IHTM14714 - Lifetime transfers: specific lifetime reliefs: gifts with reservation (GWRs): example of calculations 2
Example 2
January 2009 - Alissa makes an immediately chargeable transfer of 拢400,000 into a discretionary trust, under which she is a potential beneficiary, so the transfer is a GWR. The tax on 拢400,000 at half-death rates is 拢17,600.
July 2011 - Alissa dies without having ceased to be a beneficiary under the trust. Her death estate, including the GWR property still valued at 拢400,000, is 拢600,000 and is wholly chargeable.
First calculation
Ignore the lifetime charge and charge the gift of 拢400,000 as part of Alissa鈥檚 death estate
Jan 2009 - 拢400,000 gift ignored, so tax is nil
July 2011 - 拢600,000 death estate, total tax is 拢110,000 (payable as a result of Alissa鈥檚 death)
Second calculation
a) Charge the lifetime gift and ignore the GWR property of 拢400,000 as part of Alissa鈥檚 death estate
Jan 2009 - 拢400,000 lifetime gift. Tax at 40% = 拢30,000
Less lifetime tax paid 拢17,600
Additional tax due on death = 拢12,400
b) July 2011 - 拢400,000 gift in Jan 09 + 拢200,000 death estate (excluding the GWR property) = 拢600,000
Total tax 拢110,000
Less tax on 拢400,000 = 拢30,000
= 拢80,000
So total tax payable as a result of Alissa鈥檚 death = 拢12,400 + 拢80,000 = 拢92,400
Conclusion
The first calculation is preferred, so the value transferred by the lifetime transfer is treated as reduced to Nil. However, as lifetime tax had already been paid on the gift the credit provisions in Para 4 of Reg. 5 Inheritance Tax (Double Charges Relief) Regulations 1987 (SI1987/1130) come into play. (IHTM14712)
The lifetime tax previously paid is allowed as a credit against the tax of 拢110,000 payable on death, so that tax is reduced by 拢17,600 to 拢92,400.
You should note that the credit is limited to the amount of tax payable on the death in respect of the GWR property. In the above example that tax was (拢400,000 梅 拢600,000) 脳 拢110,000 = 拢73,333, so the full amount of the lifetime tax paid was allowable.
The credit provisions do not affect the choice of calculation, even if they operate to turn what was the higher amount of tax into the lower amount.