One of the most popular areas in the Advanced tax exam is the IHT and CGT implications of gifts to trusts. The examiners always comment that students struggle with this, and it is not too difficult to master.
A gift to a trust is called a chargeable lifetime transfer (CLT) for inheritance tax and is immediately taxed at 20%.
The gift can be reduced by annual exemptions of £3,000 for the current and previous tax years.
In addition, the nil rate band of £325,000 will also be available to reduce the tax.
A gift of £500,000 would be taxed as follows (500,000-6000-325,000) x 20% = £33,800 tax payable by the trustees.
If the tax is payable by the donee , the gift is net of 20% tax and the tax would instead be computed as 20/80 or 25%.
If the donor dies within 7 years, the CLT us taxed at 40%. The tax on death is reduced by taper relief (as long as the gap between the gift and the date of death is more than 3 years) and the £33,800 lifetime tax paid.
The tax on death is payable by the trustees 6 months after the end of month of death. No refund of lifetime tax is payable due to the deduction of taper relief.
The gift to the trust is subject to an immediate IHT charge. As a result, the gain can be postponed under s260 gift relief, and the trustees acquire the asset based on the donor’s original cost instead of the market value at the date of the gift. This means that there is no CGT liability on a gift to a trust.
If you are planning on doing Advanced Tax in June 2024, I recommend you purchase Advanced Tax Condensed which will allow you to learn the technical rules. If you then practice the key questions I recommend, you too will be ready for anything the examiner throws at you.
The book will really make the difference. You can purchase it using the links below:
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