The inheritance tax (IHT) limit has remained at the April 2009 level of £325,000 until April 2028. As a result, potentially exempt transfers (PETs) are becoming a vital tool for reducing IHT liabilities.
But what exactly is a PET, and how does it affect your IHT obligations?
What Constitutes a Potentially Exempt Transfer (PET)?
A PET is a ‘transfer of value’ either to an individual or a disabled person’s trust, which isn’t categorized as an exempt transfer.
- This ‘transfer of value’ could be a gift of cash or assets, or other forms such as forgiving someone’s debt.
- If you give away an asset but keep an interest in it, like giving away a house but continuing to live in it rent-free, this is not considered a PET. Hence, its value will be included in your estate for IHT purposes upon death.
- Exempt transfers are immediately excluded from your estate for IHT purposes. These include gifts to your spouse, charities, and political parties. There are also smaller exempt amounts for occasions like birthdays and weddings, minor gifts up to £250, and an annual exemption of £3,000.
When Does a PET Become Exempt from Your Estate?
A PET is exempt from your estate if you live for seven years after making the transfer.
If you pass away within these seven years, the inclusion amount in the estate depends on the time elapsed since the transfer:
– Up to 3 years – 100%
– 3-4 years – 80%
– 4-5 years – 60%
– 5-6 years – 40%
– 6-7 years – 20%
– Over 7 years – 0%
This applies to ‘failed PETs’. If the value exceeds the IHT threshold, the recipients are responsible for the IHT on the excess, and no nil-rate band is available to reduce the IHT in the estate. If the value is below the threshold, it’s deducted from the estate’s nil-rate band.
Insurance can cover any IHT due on failed PETs.
Effectively Utilizing PET Rules
Maintain detailed records of all PETs to document the transfers. Gifts of assets might interact with other taxes, like capital gains tax, which can be triggered by the gift.
If your estate exceeds the IHT threshold, consider using PETs (and other strategies) to lessen the tax burden.
Talk to us about potentially exempt transfers
IHT planning is intricate, extending beyond just PETs. We can conduct a comprehensive IHT review for you and your family, if necessary.
This isn’t a matter for DIY; incorrect handling can have significant tax consequences for your heirs. We encourage you to consult with us for expert guidance.
