Arford Henderson Law

potentially exempt transfer

How to get the most from a ‘potentially exempt transfer’?

This is a common way of gradually reducing your IHT liability. You don’t immediately incur Inheritance Tax when you make certain gifts while you’re alive. And if you continue to live more than 7 years after you’ve made the gift, it becomes fully exempt from Inheritance Tax.

However, you must be sure that you can ‘afford’ to give the asset away to your beneficiaries. You should not have to rely on the income that the asset produces.

You must also be aware that the asset now belongs to the beneficiaries. So if the beneficiaries were to divorce or become bankrupt then the asset is at risk.

During that 7 year period, your gift is known as a ‘potentially exempt transfer’ or PET.

If you do not survive the gift by 7 years, the exemption fails. The PET is counted as part of your estate, and is subject to Inheritance Tax. How much tax is due depends on when it was given – the rate of tax is lower for older gifts.

You must ensure that you do not have an interest in the gift that you have ‘given’ away. 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 for free in the house you gave your child more than 10 years ago. The house would still be considered part of your estate and therefore subject to Inheritance Tax. This is known as “reserving a benefit” in the property which you gave away.

There is a smart way of giving away a gift but ensuring that the gift is safe from divorce proceedings and bankruptcies. Creating a discretionary trust ensures that the gift is ring-fenced. You still keep a control of the asset, insofar as the Trustees can ensure that the asset is not sold off or squandered by the beneficiaries.

It is a good investment to obtain sound Estate Planning advice.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

Send this to a friend