Amidst plans of the UK prime Minister regarding introducing a cut into the inheritance tax (IHT) of the United Kingdom, it is essential to understand that some lifetime gifts are exempted. You may already know that inheritance tax is the tax levied on all the property, possessions or money of someone who has died and is paid by the person who has inherited the same after that person’s death. The inheritance could be by any individual (a civil partner, spouse, children, etc.) or a specified trust. Of course, some conditions should be fulfilled. For example, the estate value must be above the £325,000 threshold, but there are some exceptions, and these are Potentially Exempt Transfers. Let’s dig deeper to know all about PETs.
What are Potentially Exempt Transfers?
Suppose a person transferred some of his assets to his children in his lifetime but survived for seven years after making the transfer. In such a case, the value of that transferred assets will not be calculated as a part of his estate. These gifts will be exempted from the Inheritance Tax and are known as Potentially Exempt Transfers (PETs).
However, there is a catch! If that person dies between three and seven years after transferring these gifts, there will be an inheritance tax that will be paid by the recipient, but the tax will get reduced accordingly. This is known as Taper Relief. For example, if the years between the gift transfer and his death are between 3 to 4 years, the rate of tax on the gift will be 32%, but if the duration between the gift transfer and his death is between 4 to 5 years, the tax rate will be only 24%.
As the person transferring the gifts to another individual or trust does not survive 7 years after the gift transfer, gifts will get added to the estate, and there will be an inheritance tax on the same; PETs are deemed potentially exempt.
Here, it is essential to understand that navigating through the Potentially Exempt Transfers (PETs) is difficult. It will be beneficial to seek advice from a seasoned tax advisor if you are considering a transfer of cash, property or any of your assets as a gift to someone beloved or a trust before it is too late. In short, one must plan before making any move because the best thing about PETs is that there is no limit on the number of gift transfers in a lifetime.