Section 3A of the Inheritance Tax Act 1984 provides provisions specifically for Potentially Exempt Transfers (PETs). A PET is a transfer of value which is made during the lifetime of an individual; in other words, it is a gift of an asset and provided certain conditions are met, the PET can be exempt from IHT.
The conditions which must be met are:
- The individual must have made the transfer on or after 18th March 1986.
- It must be a gift to another individual or to a specified trust.
- No benefit from the transfer must be retained.
- Individual must survive 7 years for the full value of the asset to fall completely out of the Estate for tax purposes.
Where the death occurs after 3 years following when the transfer was made, taper relief applies and has the effect of reducing the tax liability on the transfer rather than the full rate of tax being payable. Where the death occurs within 3 years prior to the transfer being made, it will be a failed PET and the value of the asset will remain in the estate and IHT will potentially be payable.
|When was the PET made?||Percentage of IHT Payable|
|Less than 3 years prior to death||40%|
|3 – 4 years prior to death||32%|
|4 – 5 years prior to death||
|5 – 6 years prior to death||16 %|
|6 – 7 years prior to death||8 %|
|7 years or more prior to death||0 %|
Where clients have substantial assets that they do not need, making PETs are an ideal way of helping reduce an estate by giving assets away to individuals or to trusts during their life time which may otherwise be subject to IHT.
The circumstances of the individual must be looked at before a PET is made; i.e: their age and health as no deprivation of assets can be carried out. It also must be noted that the transfer must be made with the intention that no benefit from the asset is retained whatsoever, this includes no longer taking an income or for example a property being given away but the individual continues to live in that property. Both these circumstances would be subject to the Gift of Reservation of Benefit rules and for tax purposes, it will not help as the value will always remain in the estate and the tax will be payable after all reliefs have been applied.