What is a ‘potentially exempt transfer’?

Are you transferring money or assets to other individuals as part of your wealth management? Potentially exempt transfers (PETs) could be a tax-efficient way for you to reduce your inheritance tax (IHT) liability.

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What is a ‘potentially exempt transfer’?
What is a potentially exempt transfer

The inheritance tax (IHT) threshold has been frozen at the April 2009 amount of £325,000 for a further two years to April 2028. Because of this, potentially exempt transfers (PET) are increasingly important to help you reduce any IHT charges.

But what is a PET? And how do they impact on your IHT liabilities?

What is a potentially exempt transfer (PET)?

A PET is a ‘transfer of value’ to an individual or to a disabled person's trust, which is not an exempt transfer.

  • The ‘transfer of value’ can be a gift of cash or assets, but can also be other things such as forgiving a debt owed by an individual.
  • Where you give away an asset but retain an interest in it – e.g. you give away a house but continue to live in it rent-free afterwards – that will not be a PET, so, the value will be included in your estate upon death.
  • Exempt transfers, which fall outside of your estate for IHT purposes immediately, include gifts to your spouse, and gifts to charities and political parties. There are also other more-limited exempt amounts, including amounts for birthdays and weddings, minor gifts up to £250 and an annual exempt amount of £3,000 available.

When does a PET fall outside of your estate?

PETs fall outside of your estate if you survive for seven years after making the transfer.

If you die before that seventh anniversary, the amount to be included depends on the time between transfer of value and death:

  • 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%

That value relates to ‘failed PETs’. If it exceeds the IHT threshold, the recipient(s) are liable to pay IHT on the excess, and there will be no nil-rate band available to reduce IHT in the estate. If the value is less than the IHT threshold, it will be deducted from the nil-rate band in the estate.

Any IHT due on failed PET’s can be covered by insurance.

Making good use of the PETs rules

You need to keep detailed records of all PETs made, so you have evidence of the transfers made. Where there are gifts of assets, there may be interactions with other taxes such as capital gains tax, which may be triggered when making the gift.

Where you believe that your estate will be above the IHT threshold, you should consider taking advantage of the opportunity that PETs (and other measures) can offer to reduce the tax liability.

IHT planning is a complex area, covering much more than the use of PETs. We can arrange for a full IHT review for you and your family, if required. This is not an area for ‘DIY’ treatment. The tax consequences of getting it wrong can be significant for your beneficiaries, so please do come and talk to us.

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