Definition§
A chargeable transfer refers to a lifetime gift that is not covered by any available exemptions and thus becomes subject to inheritance tax (IHT). A chargeable transfer can occur under two main circumstances:
- Potentially Exempt Transfer (PET): If the donor dies within seven years of making the gift, it becomes subject to IHT.
- Chargeable Lifetime Transfer (CLT): This applies primarily to transfers into discretionary trusts and is liable to IHT at a lifetime rate of 20%.
Examples§
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Potentially Exempt Transfer (PET):
- Scenario: Jane gifts $100,000 to her nephew. If Jane passes away within seven years of making this gift, it becomes subject to IHT as it is a potentially exempt transfer.
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Chargeable Lifetime Transfer (CLT):
- Scenario: John transfers $200,000 into a discretionary trust. This transfer is neither an exempt transfer nor potentially exempt. Hence, it is liable to IHT at the lifetime rate of 20% at the time of transfer.
Frequently Asked Questions (FAQs)§
1. What qualifies as a potentially exempt transfer?§
A potentially exempt transfer typically includes gifts made directly to individuals, which are exempt from IHT if the donor survives for seven years following the gift.
2. What is an exempt transfer?§
An exempt transfer is a gift or distribution that is not liable to IHT due to existing exemptions such as annual exemptions or gifts to spouses, charities, or political parties.
3. How is inheritance tax applied to a potentially exempt transfer?§
If the donor dies within seven years of making the gift, the value of the gift is added to the estate and may be liable for inheritance tax based on applicable rates and thresholds.
4. What is a discretionary trust?§
A discretionary trust provides the trustee the power to decide which beneficiaries will receive the income and principal from the trust and how much each beneficiary will receive, and it is subject to different tax rules including the lifetime IHT rate.
5. Can annual gift exemptions prevent a transfer from being chargeable?§
Yes, annual gift exemptions (e.g., the first $15,000 gifted each year) can help prevent a transfer from being chargeable as these amounts are covered by annual exemptions.
Related Terms§
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Inheritance Tax (IHT): A tax that must be paid on the estate of a deceased person if the value of the estate exceeds the IHT threshold.
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Potentially Exempt Transfer (PET): A transfer that is exempt from inheritance tax only if the donor survives for seven years after making the gift.
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Discretionary Trust: A trust where the trustee has discretion over distributions to beneficiaries, which often involves different tax rules including chargeable lifetime transfers.
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Exempt Transfer: Transfers or gifts that are not subject to inheritance tax because they qualify under specific exemption categories.
Online References§
Suggested Books§
- “Inheritance Tax Planning: Myths, Pitfalls and Effective Solutions” by Iain Wallis
- “Discretionary Trusts: Law, Procedure and Precedents” by Roger Kerridge
- “The Everything Personal Finance in Your 20s & 30s Book” by Howard Davidoff
Accounting Basics: “Chargeable Transfer” Fundamentals Quiz§
Thank you for exploring this comprehensive guide on the concept of chargeable transfers, and for engaging with our sample quiz questions. Keep enhancing your financial acumen!
