Reduce IHT with Potentially Exempt Transfers
Inheritance Tax (IHT) can be levied on portions of your wealth at 40%, but has been called the most easily avoidable of all taxes. With our advice and a little financial planning, you can save thousands or even hundreds of thousands of pounds in Inheritance Tax.
Use our Inheritance Tax Planner to check your liability for 40% Inheritance Tax, or call 0800 678 5202 now.
One way of reducing your liability for IHT is with Potentially Exempt transfers (PETs).
These are termed potentially exempt, because they are not immediately and automatically free of Inheritance Tax.
Potentially Exempt Transfers (PETs) can be gifts made by you to another individual, or to a trust for a disabled person.
A third instance is where a wife is the beneficiary of an Interest in Possession (IIP) trust set up in her favour by her recently-deceased husband, and their minor child is a beneficiary of income. The wife may then stipulate that she will now give up any interest in the assets of the trust, and that these also become held in trust for the minor child. This also qualifies as a Potentially Exempt Transfer.
The operative word in the term Potentially Exempt Transfers is the word ‘potentially’. These can be free of Inheritance Tax, subject to what is known as the ’7-year rule’. This means they remain potentially subject to IHT until the person making the transfer survives for 7 years after they are made. In other words, if the wife in the example above makes this arrangement in favour of her child in 2011, it is not beyond the clutches of the taxman until she has survived to the year 2018.
Find out the IHT liability on your estate with our IHT calculator
What is a common potentially exempt transfer?
Perhaps the most common Potentially Exempt Transfer (PET) is your home, which can be transferred to your children as a gift before you die, subject to the 7-year rule.
However, a home only qualifies as an ‘outright gift’ if you give up all interest in it. If you continue to benefit from the house, for example by continuing to live there, this is classed as a ‘gift with reservation of benefit’ and may still be liable for IHT. The solution is to pay your children a rent, so that you technically become their tenant – although the taxman will wish to see that this rent is at the ‘going rate’, and not just a nominal payment.
If you are unsure about potentially exempt transfers, please contact our IHT advisers on 0800 678 5929 or make a financial enquiry.
