15/02/2012

Beware of the 14 year rule

Any gift that a client makes within seven years of their death will be included within their estate for inheritance tax (IHT) purposes.  In fact, earlier gifts that the client made to certain trusts within 14 years of their death could also influence the IHT liability payable on these later gifts. Our tax and trusts team explain how the 14-year rule operates and why it should be factored into future tax planning advice.

In summary

• A chargeable lifetime transfer (CLT) made in the seven years prior to a potentially exempt transfer (PET) will utilise part or all of a client’s available nil rate band should that PET subsequently fail.
• A CLT made within 14 years of death could therefore, significantly increase a client’s IHT liability.
• It is essential to be fully aware of a client’s history of previous gifts and how they may interact with any advice that is being given.

The 14 year effect

As you will know, CLTs and PETs can trigger an additional inheritance tax liability on an estate in probate if  a client dies within seven years of making them.

What is less well known is that CLTs made up to fourteen years before death may reduce the available NRB and possibly increase any IHT liability on a subsequent failed PET. This is significant since, following changes introduced in the Finance Act 2006, gifts into discretionary trusts have become far more prevalent.

What does this mean for my clients?

The 14 year rule isn’t a reason for clients not to make future CLTs or PETs but it is important to be aware of  when  giving tax planning advice as  it can make  a big difference to any  IHT  due on their estate when they die.

Some clients may be more exposed to a potential IHT liability than they think and should future gifts be considered appropriate, more thought should be given to their timing and their interaction with previous gifts.

Find out more

For a full explanation of how the 14 year rule operates please download our technically speaking document.

If you have a specific question about the tax planning opportunities covered in this email or about our tax planning solutions, please speak to your usual Legal & General representative.