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A Comprehensive Guide to Potentially Exempt Transfers (PETs) and Taper Relief


all the cash leaving a potentially exempt transfer

Estate planning can be a complex journey, and understanding the intricacies of Inheritance Tax (IHT) is an essential part of it. IHT is the tax applied to the total value of a person's assets, including possessions, property, and money, upon their passing. In the UK, IHT is levied at a rate of 40% on the amount exceeding £325,000, known as the nil rate band, unless the assets are transferred to a spouse, civil partner, or charity.


When it comes to gifting money during your lifetime, Her Majesty's Revenue and Customs (HMRC) typically has a say in the matter. While some gifts are tax-free, significant gifts don't enjoy the same immediate exemption.


In this blog, we'll focus on Potentially Exempt Transfers (PETs), often referred to simply as "gifts." PETs are transfers of assets of unlimited value that can become exempt from IHT if the giver survives for seven years. These gifts can take various forms, such as possessions, property, or money.


It's important to note that if a gift is placed into a trust, different rules apply, and these are known as chargeable lifetime transfers (CLTs), immediately subject to IHT. Trust planning can be complex, so it's advisable to consult with a financial planner for in-depth guidance.


The Seven-Year Rule


With Potentially Exempt Transfers, no IHT is payable immediately, provided the giver survives for seven years from the date of the gift. However, the name "Potentially Exempt Transfer" implies that it's only potentially tax-free. If the giver passes away within seven years, the transfer becomes chargeable.


For cash gifts below £325,000 (the nil rate band) and no other gifts have been made in the last seven years, there's no IHT to pay for the giver or the recipient. However, it does reduce the available nil rate band for the giver's estate upon their death.


If the giver passes away within seven years of making gifts exceeding the nil rate band, the entire nil rate band will be consumed, and IHT becomes payable on the excess amount. The recipient is responsible for this tax, with the rate depending on how long the giver survives after making the gifts. Gifts made within 3 years of death are taxed at 40%, and those made between 3 and 7 years are subject to a tapered relief.

Years survived

Amount of IHT due

Less than 3

40%

3 to 4

32%

4 to 5

24%

5 to 6

16%

6 to 7

8%

7 or more

0%

Calculating the exact IHT liability requires careful planning, making it advisable to consult a financial planner before making substantial gifts.


Exceptions to the Rule


Certain gifts fall outside the realm of Potentially Exempt Transfers and are not subject to IHT:


Married Couples or Civil Partners: Transfers between married couples or civil partners are not considered gifts (or Potentially Exempt Transfers) and are free from IHT, as long as they reside in the UK and are legally married or in a civil partnership.


Gifts to Charity or Political Parties: Gifts to charity or political parties are exempt from IHT.


Parental Payments for Child's Maintenance or Education: Payments by parents towards child maintenance or education are not regarded as gifts and are IHT-exempt if the child is under 18 or in full-time education. This exemption doesn't apply to similar payments from grandparents.


Expenditure out of Income: Regular gifts made from surplus income that don't impact the giver's standard of living are immediately exempt and treated as having left the estate. These gifts are not added back to the estate upon the giver's death.


Annual Exemption: You can gift up to £3,000 each year, and this amount won't be added back to your estate upon your death. If the previous year's allowance is unused, you can carry it forward to make £6,000.


Small Gifts: You can make an unlimited number of small gifts of up to £250 to different people each year.


Gifts in Consideration of Marriage: Parents can gift up to £5,000 in consideration of marriage or civil partnership, while grandparents can gift £2,500, and any other person can gift £1,000.


Potentially Exempt Transfers (PETs) and the associated Taper Relief can significantly impact your estate planning and IHT liability. Understanding these aspects is crucial for making informed decisions about your financial future. As Astute Wills, I'm here to provide you with expertise and guidance in estate planning. Whether you're considering gifts, trust planning, or other aspects of estate management, feel free to reach out to discuss your specific needs. Your financial future and legacy are in capable hands.


If you’re looking to write your will or lasting power of attorney book an appointment with Joshua Young. I am A Will Writer covering Farnborough, Basingstoke, Camberley, Aldershot and the surrounding areas.


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