WillsPotentially Exempt Transfers

Gifts made during lifetime may be considered when calculating IHT on death if they do not fall into any of the inheritance tax exemptions and allowances (see our previous newsletter). These are known as Potentially Exempt Transfers (or PETs).

To be considered as a PET, the gift must be either a gift to an individual, to a disabled person’s trust or finally if an Interest in Possession (IIP) trust comes to an end but continues as a disabled persons trust.

If the giver dies within 7 years of making the PET, the gift will become chargeable and be considered as part of their estate on their death. The deceased’s NRB will firstly be applied towards any PETs.

If a person has made multiple PETs, NRB will be applied to the earliest PET first. If there is any NRB leftover, it will then be applied to the next PET until NRB has run out. Any PETs made on the same day will benefit from the NRB proportionately.

If the giver survives the gift by 3 years, there will be taper relief available to them as follows:

• Survives by 3-4 years: 20%
• Survives by 4-5 years: 40%
• Survives by 5-6 years: 60%
• Survives by 6-7 years: 80%

Please note that the taper relief applies to the IHT due, not to the value of the gift.

Example:

Mrs Smith makes a gift to her son, Rory in June 2012 of £450,000. She dies in July 2016. In her lifetime, she made no other lifetime gifts. Her estate at death was worth £200,000. As she failed to survive by 7 years, the PET becomes chargeable. IHT would be worked out as follows:

£450,000 (PET value) – £325,000 (NRB) – £6,000 (2x annual gift exemption) = £119,000

£119,000 x 40% = £47,600 x 40% (4-5 year taper relief) = £19,040 (total IHT payable on the PET).

£200,000 x 40% = £80,000 (estate IHT) + £19,040 (PET IHT) = £99,040 (total IHT).

Who Pays the IHT on a PET?

If the giver of a gift dies within 7 years of a making a PET, it is the recipient of the gift that will be liable to pay the IHT due on the PET. However, this will only be the case if the PET is chargeable.

Using the above example, Rory would be liable to pay the IHT due from his mother’s failed PET as it is chargeable. However, if the mother gave him £300,000 instead, he would have no liability to pay the PET as it was not chargeable.

Say Mrs Smith gave Rory £200,000 in June 2012, and a month later she gave her daughter Rosie £200,000. Rory would not be liable to pay any IHT from his gift as it was not chargeable in its own right. Rosie’s gift however would push the total value of the PETs above the NRB, making her gift chargeable. She would therefore be liable for any IHT due from the failed PET.

Whilst the recipient is personally liable, most Wills are written so that the executors will pay any tax due from lifetime gifts.