Definition of a potentially exempt transfer
The majority of gifts made during a person’s life are not subject to tax at the time of the gift.
These lifetime transfers are known as ‘potentially exempt transfers’(‘PETs’).
A PET is a gift made during a person’s lifetime that may become exempt from inheritance tax if the donor survives for a certain period of time after making the gift.
These gifts or transfers achieve their potential of becoming exempt from Inheritance Tax if the taxpayer survives for more than seven years after making the gift.
PETs in the UK are subject to what is known as the “seven-year rule”.
This means if the person making the gift – also referred to as ‘the donor’ – survives for at least seven years after the date of the gift, then the gift is considered to be exempt from inheritance tax.
However, if the donor dies within seven years of that date, the value of the gift may be included in the donor’s estate for inheritance tax purposes.
Not all gifts are considered to be PETs, and there are certain exceptions and conditions that apply. Look at the government’s Inheritance Tax Manual to find some examples of when a gift is considered to be a PET.
What is an example of a potentially exempt transfer?
An example of a PET could be a parent gifting a sum of money or an asset, such as a house or shares, to their child.
If the parent survives for at least seven years after making the gift, the value of the gift would be exempt from Inheritance Tax (IHT) and would not be included in the parent’s estate for tax purposes.
So if a parent gifts £50,000 to their child and survives for seven years after making the gift, the value of the gift would be exempt from IHT, and the child would not have to pay any tax on the gift.
However, if the parent were to pass away within the seven-year period, the value of the gift would be included in their estate for IHT purposes, and the child may have to pay tax on the gift depending on the total value of the parent’s estate.
It is important to note that not all gifts qualify as PETs, and certain rules and exceptions may apply depending on the circumstances.
PET Taper relief
There is tapered relief available if the donor dies within the seven-year period.
The relief is applied on a sliding scale, which means that the amount of tax payable decreases as the time since the gift was made increases. The longer the donor survives, the less tax is payable on the gi
The effective rates of tax on the excess over the nil rate band for PETs is:
- 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%
HMRC’s internal Inheritance Tax manual states that subject to certain exceptions, a PET is a lifetime transfer of value that satisfies three conditions. They are that:
- the transfer is by an individual on or after 18 March 1986
- it would be a chargeable transfer apart from IHTA84/S3A (or, if only partly chargeable, is a PET to the extent that it would be chargeable), and
- it is a gift to another individual or to a specified trust.
How to declare a potentially exempt transfer
If you have made a gift during your lifetime that may be subject to Inheritance Tax (IHT), you may need to declare the gift to HM Revenue & Customs (HMRC) on a self-assessment tax return.
To declare a PET, you should complete the relevant sections of the self-assessment tax return that relates to gifts and transfers of assets.
You should report any gifts made during your lifetime that exceed the annual exemption threshold of £3,000 per year or fall outside the scope of other exemptions, such as gifts to charity or to your spouse.
When completing the tax return, you will need to provide details of the gift, including the date it was made, the value of the gift, and the name and address of the recipient.
You will also need to indicate whether the gift is a PET and whether you have survived for at least seven years since making the gift.
If you are considering large gifts which could qualify as a Potentially Exempt Transfer (PET), we advise you keep records of the gift and when it was made.
If you have any questions or concerns about how to declare a PET, it is advisable to seek professional advice from a qualified accountant or tax specialist. They can provide guidance on the specific rules and requirements for reporting gifts and estates for tax purposes.