What is Potential Exempt Transfer?

A Potentially Exempt Transfer (PET) enables an individual to make gifts of unlimited value which will become exempt from Inheritance Tax (IHT) if the individual survives for a period of seven years.

If you don’t survive the gift by seven years, the PET becomes a Chargeable Consideration, and is added to the value of your estate for IHT. If the combined value is more than the IHT threshold, IHT may be due.

Any lifetime transfer that is Potentially Exempt must meet certain conditions subject to certain exceptions. The transfer is a gift made by an individual to another individual or to a specified trust. This means, for example, the gift cannot be made from or to a corporation or company.

For example, if a gift of £400,000 is given:

1. The gift will initially use up the available NRB of £325,000 (oldest gifts are attributed first).
2. The remaining £75,000 on death is then subject to IHT (in addition to IHT on the estate).
3. If the remaining £75,000 was given over three years before the death, taper relief may apply.
4. For example, if the whole gift was made between three and four years before the death, the tax charge on the £75,000 would be 32%.
5. So IHT due on the PET would be £24,000.

Gifts where you still have an interest in it, no matter when you’ve given it, don’t qualify as a PET.

For example, if you continue to live rent-free in the house you gave your child more than ten years ago, the house would still be considered part of your estate and therefore subject to IHT. This is known as a gift with a reservation of benefit.

For tax advice, consult a qualified accountant.