Inheritance Tax

…Potentially Exempt Transfers and planning

In our previous Inheritance Tax – An Introduction and Inheritance Tax – Nil Rate Band’s and Relief’s articles, we covered the background, administrative aspects and available Nil Rate Bands/reliefs in relation to Inheritance Tax. In this article, we will review Potentially Exempt Transfers and some basic planning issues to consider.

We will start with a look at Potential Exempt Transfers:

Potentially Exempt Transfers

Potentially Exempt Transfers (PETs)As indicated in our previous articles, most 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’ or ‘PETs’.  These gifts or transfers achieve their potential of becoming exempt if the taxpayer survives for more than seven years after making the gift.

If the taxpayer dies within 3 years of making the gift, then the Inheritance Tax position is as if the gift was made on death. A tapered relief is available if death occurs between three and seven years after the gift is made, which has the potential to reduce the amount of tax payable on the gift.

The rules surrounding PETs have resulted in many people wanting to make gifts long before they die. The problem in practice is that they do not want to give up control over the assets concerned. A common example is a person giving their house away but continuing to live in it rent-free. Such gifts are known as ‘gifts with a reservation of benefit’. The taxman does not accept that a true gift has been made so the ‘gift’ remains subject to Inheritance Tax even if the taxpayer dies more than 7 years later.

Over the years many schemes have been developed in an attempt to get around the rules surrounding ‘gifts with reservation’. However, the tax rules have been tightened up to make this all but impossible now.

Inheritance Tax – reduced rate guidance

A reduced rate of Inheritance Tax of 36% (reduced from 40%) applies where 10% or more of a deceased’s net estate after deducting IHT exemptions, reliefs and the nil rate band is left to charity.

Inheritance Tax Planning

There are some basic issues that everyone should consider including:

Making a will

Even if no Inheritance Tax is going to be due when you die it is important to write a will. If you do not do this, you will die intestate and you will have no control as to who inherits your belongings. The rules of intestacy rarely operate how you might expect. They are especially unwelcome in many cases involving single people, married people with children and couples who live together but who are who are not married or in a civil partnership.

Your will can also be used to arrange the transfer of your assets to keep the Inheritance Tax due on death to a minimum.


A trust is an obligation that binds a trustee (which can be an individual or a company) to deal with your assets – such as land, money, shares or even antiques – for the benefit of one or more ‘beneficiaries’. The trustees are the ones who make decisions about how the assets in the trust are to be managed, transferred or held back for the future use of the beneficiaries.

There are three main situations when Inheritance Tax may be due on trusts:

  • When assets are transferred – or settled – into a trust.
  • When a trust has been in existence for ten years.
  • When assets are transferred out of a trust or the trust comes to an end.

Much Inheritance Tax planning involves the careful use of trusts – both those that may be established during your lifetime and those that are established by your will when you die.

There are a number of different types of trusts. Each is subject to different tax rules such that it is important to ensure that any planning exercises create the desired type of trust so that the overall tax burden is kept to a minimum.

Potentially Exempt Transfers (PET’s)

As detailed above an individual can make gifts to another individual with no immediate tax being payable and provided they survive 7 years from the date of the gift, there would be no tax payable even upon death.

Both gifts into trusts and as PET’s provide opportunities to give away assets with no immediate Inheritance Tax charges (for trusts the gift has to be within the Nil Rate Band) and for the gift to drop out of the individual’s estate entirely for Inheritance Tax purposes. This could be particularly useful for assets expected to increase in value over time. Advice should be taken prior to making a gifts to ensure that the gift is structured correctly and whether there are any other tax implications, such as Capital Gains Tax.

Record keeping

You should keep a record of any gifts you make and record any exemptions that you use as well as details of what you intend should be treated as regular gifts made out of surplus income.

Executors or personal representatives must keep:

  • a copy of the will and all signed Inheritance Tax forms
  • a copy of all signed Inheritance Tax forms
  • the necessary paperwork from the death of a first spouse or civil partner if any unused Inheritance Tax threshold is to be transferred.

How can Essex Abel help?

We would welcome the opportunity to assist you in arranging a review of your affairs to identify the prospective Inheritance Tax payable on your estate at death. We could then discuss with you the steps that you could take to reduce this liability. Some such steps could be quite straightforward. If the sums involved warrant more extensive planning and you wish to consider this, we can help you here too.

Essex Abel’s team have many years’ experience of advising people in relation to their Inheritance Tax position and offer a FREE consultation to discuss your affairs, if you would like to take advantage of this offer, please contact us.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Neither Essex Abel Ltd nor the author accept any responsibility whatsoever for any action taken based upon the information included in this article.