Potentially Exempt Transfers

Lifetime Transfers

Gifts made above and beyond the IHT Exemptions during one's lifetime to individuals or certain types of Trust are generally considered to be whats known as Potentially Exempt Transfers or PET's. That is to say, the gift or transfer of value would be potentially free of IHT based on the assumption that the donor survives for a further 7 years after making the gift.

Potentially Exempt Transfers

 

In order for a gift to qualify as a Potentially Exempt Transfer it needs to satisfy two criteria:


Firstly, there must be NO Reservation of Benefit - that is to say that one cannot make a gift and then carry on enjoying benefit from that gift. For example, one couldn't make a gift of the Rolls Royce and continue driving it to Church on Sundays! Furthermore, any gifts made during one's lifetime that were deemed by HMRC (after death) to have retained a reservation of benefit, then such gifts will be included in the Estate for the purpose of IHT calculation.

 

Secondly, the gift must be totally irrevocable - this means that you cannot make a gift and then take it back.

 

On the assumption that these criteria have been satisied such gifts would be fully exempt from IHT as long as the donor survives for a period of 7 years. The 7 year period was effectively formulated to avoid the spectre of IHT efficient death bed transfers.

 

Taper Relief for Potentially Exempt Transfers

 

Should the donor die within the first 3 years of making the PET there would be no relief from IHT but there is a tapering relief from IHT should death occur within years 4 to 7 of making the gift. For example should death occur after 3 years but less than 4 years after making the transfer the IHT payable would be 80% of the normal 40% rate. For death between years 4 and 5 IHT would be payable at a rate of 60% of 40% and so on tapering down to zero after year 7.

 

Chargeable Lifetime Transfers

Care needs to be taken when making lifetime gifts, particulary gifts that are made to Trusts. Prior to the Budget of March 2006, most gifts to Trusts were deemed to be Potentially Exempt Transfers, but since then, gifts to trusts other than Disabled Trusts, Bare Trusts or Charitable Trusts will be considered to be Chargeable Lifetime Transfers (CLT's). With CLT's IHT is potentially payable immediately. Yes, you read that correctly, with CLT's IHT is potentially payable during ones lifetime!

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