When considering making significant lifetime gifts, it’s essential to understand the rules surrounding Potentially Exempt Transfers (PETs) and their implications for inheritance tax (IHT).

What Are Potentially Exempt Transfers (PETs)?

Most gifts made during a person’s lifetime are not subject to tax at the time they are given. These gifts are known as Potentially Exempt Transfers (PETs). For a PET to become exempt from IHT, the person making the gift must survive for more than seven years after making the gift.

Inheritance Tax Rates for PETs

If the taxpayer dies within three years of making the gift, the IHT is applied as if the gift was made on death. However, a tapered relief is available if death occurs between three and seven years after the gift is made. The effective rates of tax on the excess over the nil rate band for PETs are as follows:

• 0 to 3 years before death: 40%
• 3 to 4 years before death: 32%
• 4 to 5 years before death: 24%
• 5 to 6 years before death: 16%
• 6 to 7 years before death: 8%

Retained Enjoyment and IHT

Inheritance tax may still be chargeable if the person making the gift retains some ‘enjoyment’ of the gift. For instance, if an elderly person gifts their home to their children but continues to live in the house rent-free, the taxman will not consider it a true gift. In such cases, the ‘gift’ remains subject to IHT even if the taxpayer dies more than seven years after the transfer.

Why Consider Making Significant Gifts Now?

If you are currently considering making a significant gift to your loved ones, it may be prudent to contemplate doing so sooner rather than later. With the possibility of changes to the tax regime, especially with a new government in place, acting now could be beneficial.

Understanding the implications of Potentially Exempt Transfers and planning accordingly can help you make informed decisions about significant lifetime gifts. Considering the potential changes in the tax regime, it might be wise to act sooner rather than later.