As Benjamin Franklin observed in 1789 ‘In this world nothing can be said to be certain, except death and taxes.’ More than two centuries on, this statement still rings true! These days however, inheritance tax is often referred to as a voluntary tax, because there are various ways to minimise liability to it, or even avoid it all together.

PETS

Any assets (cash or otherwise) that a person gives away during their lifetime, that do not fall under the exempt transfer rules, such as transfers between spouses and civil partners and gifts to charities, may escape inheritance tax as a potentially exempt transfer (PET).

There is no limit on the amount of PETs that can be made during a lifetime.

Broadly, for a PET to escape inheritance tax completely the donor needs to survive for seven years after making the gift. If he or she dies within the seven-year period, the PET is partially chargeable depending on the number of years that have elapsed since they made the gift.

The reduction is given in the form of taper relief, a sliding scale used to determine tax liabilities on gifts between three and seven years before death.

Current rates of taper relief and the resulting IHT rate are as follows:

Period before death in which gift made:

0 to 3 years – reduction 0%; tax rate is 40%
3 to 4 years – reduction 20%; tax rate 32%
4 to 5 years – reduction 40%; tax rate 24%
5 to 6 years – reduction 60%; tax rate 16%
6 to 7 years – reduction 80%; tax rate 8%
More than 7 years – reduction 100%; tax rate 0%
If the donor dies within seven years of making a PET the value of that PET will be added in to the value of his or her estate to determine how much, if any, inheritance tax is due.

The PET will therefore use up some or all of the available nil-rate band, potentially increasing or even creating an inheritance tax liability for the estate. In addition, if the value of the PET exceeds the level of the nil-rate band in force for the year in which the donor dies, then additional inheritance tax will be payable by the recipient of the gift.

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