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‘Potentially exempt transfers’ for Inheritance Tax

Most gifts you make to other people during your lifetime, unless they fall into the list of tax free gifts are classified as potentially exempt transfers, or PETS for short.

If you survive for seven years after making the gift, no inheritance tax is due. However, if you die within this time, the gift will be added to your estate, and reassessed against other PETs you have given and your tax-free allowance, which currently stands at £325,000.00.

If the seven-year running total of PETs, chargeable gifts and your estate comes to less than the unused tax-free allowance, no tax will be due.

However, if much of the tax-free allowance has been used up against PETs and taxable lifetime gifts, this can leave little or no allowance to be used against the rest of the estate.

What about IHT ‘taper relief’?

If tax does become due on a PET, the person who received the PET will be asked to pay the tax. However, the tax may be reduced because of ‘taper relief’.

An often overlooked part of taper relief is that it will only kick in if the amount you gift is worth more than your £325,000 allowance, so unless you’re transferring huge sums, it probably won’t apply.

An essential point to note is that if you die within seven years of making gifts worth more than £325,000, the full 40% IHT rate could be levied on the recipient.

While taper relief may reduce tax on PETs if you die within seven years of making them, it won’t reduce the tax due on your estate as a whole.

This is a complex area and highlights the need to properly plan your estate and ensure that your will reflects both your wishes and maximises the tax reliefs available to both individuals and businesses.

This article was correct at the date of publication. It is intended as an aid and cannot be expected to replace specific professional advice and judgment. No liability for errors or omissions will be accepted. It is the responsibility of those using the information to ensure it complies with the law at the time of use and that it is used in line with relevant rules and regulations governing the subject matter in question.