Chargeable lifetime transfers (CLTs) are gifts made during your lifetime that may be taxed if they exceed a certain amount. Understanding these transfers, specifically chargeable lifetime transfer, and the tax implications is key to good estate planning. Here we explain what CLTs are, the tax implications and how they fit into overall estate planning.
Summary
- Chargeable Lifetime Transfers (CLTs) are gifts made during your lifetime that are taxed if they exceed £325,000, currently 20%
- Valuing CLTs accurately is important for tax purposes, with exemptions and reliefs available to reduce inheritance tax liabilities, including the annual exemption and Business Property Relief.
- Professional advice from inheritance accountants or financial advisors is essential to navigate the complexities of CLTs to ensure compliance and tax efficiency.
What is a Chargeable Lifetime Transfer?
Chargeable Lifetime Transfers (CLTs) are part of estate planning. Simply put, these are gifts made during your lifetime that are taxed if they exceed the nil rate band, which is £325,000 until April 2028. You need to understand the tax implications fully before making these transfers.
The tax on CLTs is 20% on the amount above the nil rate band. This is less than the 40% rate on death, so CLTs are a good way to reduce your inheritance tax liability. But if the donor dies within 7 years of making the gift, additional tax will be due, complicating the tax picture.
It’s important to distinguish between Chargeable Lifetime Transfers (CLTs) and Potentially Exempt Transfers (PETs). CLTs are immediately chargeable, PETs are only taxed if the donor dies within 7 years of making the gift. These are key to good estate planning and tax management.
Potentially Exempt Transfers (PETs)
A Potentially Exempt Transfer (PET) is a gift made by an individual during their lifetime that is not immediately chargeable to Inheritance Tax (IHT). However, if the donor dies within seven years of making the gift, it becomes chargeable to IHT. PETs are typically made to individuals, such as family members or friends, and can include gifts of cash, property, or other assets.
To qualify as a PET, the gift must be made without any conditions or reservations. If the donor retains any benefit or control over the gifted asset, it may be considered a Gift with Reservation (GWR) and subject to different tax rules.
PETs are an important consideration in estate planning, as they can help reduce the amount of IHT payable on death. However, it’s essential to carefully consider the timing and value of PETs to ensure they are made in a tax-efficient manner.
Valuing Chargeable Lifetime Transfers
Valuing Chargeable Lifetime Transfers (CLTs) is important for the tax implications. The value is based on the amount transferred, exemptions and inheritance tax. This ensures accurate tax calculations and reflects the true impact on the donor’s estate.
One important thing to consider when valuing CLTs is grossing up. If the transferee is paying the inheritance tax, the amount received is adjusted to reflect the tax liability, resulting in a higher grossed-up value. But if the transferee is paying the tax, grossing up is not needed. This can make a big difference to the overall tax calculation.
Accurate valuations are important for making decisions on lifetime gifts and transfers to ensure good estate management and reduced tax liability.
Inheritance Tax and Chargeable Lifetime Transfers
Inheritance tax (IHT) is key to Chargeable Lifetime Transfers. The nil rate band for IHT is £325,000 until April 2028. CLTs above this are taxed at 20% so planning and assessing IHT liability is important.
Unlike inheritance tax, which considers specific assets as excluded property not subject to tax, capital gains tax applies to assets like cars, highlighting the differences in treatment of certain assets.
The interaction between CLTs and Potentially Exempt Transfers (PETs) can make the IHT calculation more complicated especially if the individual dies within 7 years of making the gift. If the total value of CLTs in a 7 year period exceeds the nil rate band, the excess is taxed at 20% IHT.
CLTs are included in the IHT liability if the donor dies within 7 years. A full review of all significant gifts made with CLTs is needed to calculate IHT liability.
Exemptions from Chargeable Lifetime Transfers
Exemptions are important for managing the IHT liability of CLTs. The annual exemption for CLTs is £3,000 so you can give tax free gifts each year. The small gift exemption allows you to give up to £250 to as many people as you like without incurring IHT.
Gifts between spouses are generally IHT free so these transfers won’t affect the taxable estate. This is good for married couples and civil partners who want to transfer wealth without incurring tax liabilities.
Other exemptions include gifts to registered charities which are IHT free. Gifts for the maintenance of family members and wedding gifts that meet HMRC’s rules are also exempt. These exemptions give you various ways to reduce the taxable value of CLTs and make estate planning more flexible and tax efficient.
Gifts with Reservation
A Gift with Reservation (GWR) occurs when a donor makes a gift but retains some benefit or control over the gifted asset. This can include gifts of property where the donor continues to live in the property or receives rent from the property.
GWRs are subject to different tax rules than PETs and are typically considered part of the donor’s estate for IHT purposes. This means that the gifted asset will be included in the donor’s estate on death, and IHT may be payable.
However, there are some exceptions to this rule. For example, if the donor pays full market rent for the use of the property, it may not be considered a GWR. It’s essential to seek professional advice when making gifts with reservations to ensure they are structured in a tax-efficient manner.
Reliefs for Chargeable Lifetime Transfers
Reliefs are important for managing CLTs. Business Property Relief (BPR) and Agricultural Property Relief (APR) can reduce IHT liability. BPR applies to qualifying businesses and their business assets and APR is for agricultural and business property so reduces tax on these assets.
From April 2026 BPR and APR reliefs will be 100% for the first £1 million of qualifying assets and 50% on any value above that. Planning is key to get the most out of these reliefs.
Taper relief reduces the tax on Chargeable Lifetime Transfers (CLTs) by 20% each year from the 3rd year after the gift. For CLTs made more than 3 years before death taper relief can reduce IHT liability significantly. Using these reliefs can reduce the overall tax on CLTs.
Advanced Planning with Chargeable Lifetime Transfers
Chargeable Lifetime Transfers (CLTs) are gifts made by an individual during their lifetime that are immediately chargeable to IHT. CLTs are typically made to trusts, such as discretionary trusts, and can include gifts of cash, property, or other assets.
Advanced planning with CLTs involves carefully considering the timing and value of the gifts to minimize the amount of IHT payable. This can include using the annual exemption, making gifts to charity, and using business property relief.
It’s also essential to consider the impact of CLTs on the donor’s nil rate band and the potential for taper relief. Taper relief can reduce the amount of IHT payable on CLTs if the donor survives for at least three years after making the gift.
Using Trusts and Life Insurance Policies
Trusts and life insurance policies can be used in conjunction with PETs and CLTs to minimize the amount of IHT payable. For example, a discretionary trust can be used to hold assets that are subject to IHT, and a life insurance policy can be used to cover the potential IHT liability.
It’s essential to carefully consider the type of trust and life insurance policy used, as well as the terms and conditions of the policy. A whole of life policy can provide a lump sum to cover the IHT liability on death, while a term policy can provide cover for a specific period.
Reporting for Chargeable Lifetime Transfers
Accurate reporting of CLTs is important for HMRC compliance. CLTs must be reported within 12 months of the end of the month of transfer using the IHT100 form which is for chargeable transfers and trust settlements.
Transfers above the IHT threshold must be reported on the IHT100 form. Failure to report in time can result in penalties for late reporting. Also you must inform HMRC if any details of a reported CLT change after submission.
Accurate and timely reporting of CLTs ensures all tax is accounted for, manages the estate in line with tax laws and avoids complications and penalties.
IHT on Chargeable Lifetime Transfers
IHT on CLTs is calculated in several steps. Subtract the nil rate band from the total value of the transfer, then add any reliefs. Anything above the nil rate band is taxed at 20%.
Look back 7 years to see if any CLTs were made, these reduce the nil rate band. The tax on transfers above the nil rate band is recalculated at 40% on the donor’s death so the timing of asset transfers is key to overall IHT liability.
Taper relief can reduce IHT on CLTs. This happens if the donor survives for at least 3 years after the gift. If the donor dies within 7 years the IHT will be recalculated to the full death rate of 40%. This has a big impact on the overall tax on CLTs so planning is critical.
Recent Changes and Chargeable Lifetime Transfers
Recent changes have changed Chargeable Lifetime Transfers. From April 2025 individuals living abroad will have IHT assessed on residence not domicile so CLTs will need to be planned and executed differently for expatriates.
Trustees will also need to reassess their IHT exposure due to the changes on the 10 year charge and capital distributions from trusts. These changes mean individuals and trustees need to review their succession plans to reduce IHT liability as the rules change.
CLTs can affect gifts made up to 14 years before death, extending the period of assessment and potentially increasing tax in the tax year. Keeping up to date with these changes is key to estate planning and tax management.
Case Studies: Examples of Chargeable Lifetime Transfers
Examples of Chargeable Lifetime Transfers in practice. John has gifts of £1,000,000 and a net worth of £2,000,000. His CLTs need to be planned to reduce IHT liability and maximise exemptions and reliefs.
And another example is Amy who gifted £500,000 to Alicia and £500,000 to Michael 7 years later. By spreading the gifts over time Amy can use annual exemptions and reduce the tax on her estate.
These case studies show the importance of planning, reliefs and exemptions. They help to illustrate the practical implications of CLTs and the need for professional advice to navigate IHT.
Professional Advice on Chargeable Lifetime Transfers
Professional advice is key for Chargeable Lifetime Transfers. Inheritance accountants or financial advisors will help you navigate the CLT planning and reduce tax liability. They will provide bespoke solutions to ensure compliance and tax efficiency.
Inheritance accountants will help you work out the transferred value, apply exemptions and calculate IHT rates. They may suggest using annual and small gift exemptions to reduce the taxable value of CLTs. They can also use Business Property Relief and Agricultural Property Relief to reduce overall IHT liability.
Seeking professional advice means you make informed decisions on CLTs and achieve tax efficiency and compliance. That’s what matters for your loved ones and the causes they care about.
How an Inheritance Accountant Can Help
An inheritance accountant can provide invaluable assistance in navigating the complex rules surrounding PETs, CLTs, and IHT. They can help individuals understand their IHT liability and develop a strategy to minimize the amount of tax payable.
An inheritance accountant can also help with the following:
- Calculating the IHT liability on PETs and CLTs
- Advising on the use of trusts and life insurance policies
- Ensuring compliance with IHT rules and regulations
- Providing guidance on the use of reliefs and exemptions
- Assisting with the completion of IHT returns and payment of tax
By seeking the advice of an inheritance accountant, individuals can ensure that their estate is planned in a tax-efficient manner and that their loved ones are protected from unnecessary IHT liabilities.
Conclusion
In summary Chargeable Lifetime Transfers are key to estate planning. Individuals can manage their wealth, reduce tax liability and preserve their financial legacy. By valuing CLTs, using exemptions and reliefs and keeping up to date with changes in the rules individuals can make informed decisions for their estate.
Seeking professional advice will make CLT planning even more effective and ensure compliance and tax efficiency. With planning and knowledge of CLTs you can navigate IHT and secure your financial future.
FAQs
What is a Chargeable Lifetime Transfer (CLT)?
A Chargeable Lifetime Transfer (CLT) is a gift made while the individual is alive that becomes IHT taxable if the value exceeds the nil rate band of £325,000. Anything above that is taxed at 20%
How is a Chargeable Lifetime Transfer valued?
A Chargeable Lifetime Transfer (CLT) is valued by the amount transferred, exemptions and IHT implications. If the transferee pays the tax the grossing up may adjust the net amount to reflect the tax effect.
What are the tax implications if the donor dies within 7 years of making a CLT?
If the donor dies within 7 years of creating a Charitable Lead Trust (CLT) the IHT is reassessed at 40% but taper relief may apply if the donor survives for at least 3 years after the gift. You need to plan accordingly to reduce the tax liability.
What exemptions are available for Chargeable Lifetime Transfers?
Chargeable Lifetime Transfers (CLTs) can use several exemptions including the annual exemption of £3,000, small gift exemption of £250, gifts to spouses, charitable gifts and gifts for maintenance of family members. Using these exemptions can reduce the taxable value of CLTs.
Why is professional advice important for managing CLTs?
Professional advice is essential for effectively managing CLTs as it ensures compliance with regulations and minimizes tax liabilities. By consulting with inheritance accountants and financial advisors, individuals can achieve optimal tax efficiency and navigate the complexities involved.