Potentially Exempt Transfers (PETS) are when there is no UK Inheritance Tax (IHT) due on gifts that the donor makes if they live for 7 years after making the gift. If the donor of the gift does not survive 7 years then the gift made may be taxable on death if the gift, or the cumulative effect of previous gifting, exceeds the Nil-Rate Band allowance, which is currently £325,000.
The amount of IHT due on the gift depends when it was given. Any gift made within the preceding 3 years before death will be taxed at the usual rate of 40%. For gifts given 3 to 7 years before death, will be taxed via The Taper Relief scale as follows:
- Gifts made between 3 – 4 years before death: 80% of IHT will be payable (@ 32%)
- Gifts made between 4 – 5 years before death: 60% of IHT will be payable (@ 24%)
- Gifts made between 5 – 6 years before death: 40% of IHT will be payable (@ 16%)
- Gifts made between 6 – 7 years before death: 20% of IHT will be payable (@ 8%)
A common misunderstanding is that taper relief is applicable on any size gift if made in the preceding 7 years before death. This is incorrect because the taper relief is only applicable if the donor has given away more than £325,000.
A helpful illustration: Beth died on 1 July 2018. She gave 3 gifts in the 9 years before her death:
- £50,000 to her brother 9 years before her death = No IHT to pay
- £325,000 to her sister 4 years and 2 months before her death = No IHT to pay
- £100,000 to her friend 3 years before her death = pay IHT @ 32%, as it’s above the tax-free threshold and 3 years before Beth died.
The reason that Beth’s friend must pay the Tax is because the primary liability for the IHT will fall on the recipient of the gift.
If you have any questions or need further clarification, please contact Wayne Barnett on 99147650 or [email protected]
