Inheritance Tax Gifts Over £3,000 via Potentially Exempt Transfer PET

As you may already be aware in the UK, we each have:

• An inheritance tax (IHT) nil rate band allowance of £325,000.
• A private residence nil rate band of £175,000 (if we own our own home and we leave it to direct line descendants). 
• A total of £500,000 IHT allowances per person.
• If your spouse has predeceased you and left everything to you meaning no allowances were used up, their unused allowances can be transferred to you meaning up to £1m of inheritance tax allowances.

These allowances have been frozen for many years and look to remain frozen until 2028 meaning the UK is paying ever higher inheritance taxes on death and we can see this with HMRC’s record inheritance tax receipts in 2022 and 2023.  Therefore, you need to act and make sure you not only use your basic inheritance tax annual gift exemptions, but you do even more to protect from this disgusting tax.

Inheritance Tax is Gift Tax

Inheritance tax is not a death tax, it is a transfer of value tax, a gifting tax.

It is true that many gifts are made on death via our Wills (or under intestacy laws) but gifts in life may also be subject to inheritance tax.

You Can Gift More than £3,000

Our annual gifting allowance, where the gift is immediately outside the estate is £3,000 for the current tax year plus any unused allowance (up to £3,000) from last year (you cannot go back more than just the previous year).  See IHT Exemptions

That said, you can gift more than £3,000 pa.  If you gift say another £10,000 or £30,000, on top of the £3,000, this is perfectly legal.   But it then becomes a Potentially Exempt Transfer (PET).

PETs and 7 Year Rule

• Gifts in excess of the £3,000 will usually be deemed as Potentially Exempt Transfers (PETs).
• To qualify as a PET, the gift must be made to individual people or a ‘bare’ trust (a trust where beneficiaries are fixed and cannot be changed). 
• If gifts are made to other types of trusts or companies, they are not PETs and are Chargeable Lifetime Transfers (CLTs) and may be subject to 20% inheritance tax immediately (see CLT below).
• PET gifts are cumulative over a 7-year period. 
• If you stay below the IHT Annual Allowance (currently £325,000) then after 7 years, the gift is totally outside the estate and is inheritance tax free.
• Gifts made in year 1 that fall outside the estate (end year 7) can then be replaced with new gifts in year 8 adding to the cumulative amount of gifts made in the 7 years (year 2 to year 8).
• If you die, all gifts made within the last 7 years are included in the estate.

Example Gifts Over 10 Years:

• Year 1 – 1^st Gift of £50,000 (cumulative total in 7 years £50,000)
• Year 2 – 2^nd Gift of £50,000 (cumulative total in 7 years £100,000)
• Year 3 – 3^rd Gift of £50,000 (cumulative total in 7 years £150,000)
• Year 4 – 4^th Gift of £50,000 (cumulative total in 7 years £200,000)
• Year 5 – 5^th Gift of £50,000 (cumulative total in 7 years £250,000)
• Year 6 – 6^th Gift of £50,000 (cumulative total in 7 years £300,000)
• Year 7 – 7^th Gift of £25,000 (cumulative total in 7 years £325,000 – to stay below the £325,000 meaning inheritance tax threshold is not breached so no Taper Relief issues will come into play in you die.
• Year 8 – Year 1 gift falls out of 7-year rule and is outside the estate.  8^th Gift of £50,000 (cumulative total in 7 years is still £325,000 – to stay below the £325,000 meaning inheritance tax threshold not breached so no Taper Relief issues will come into play if you die)
• Year 9 – Year 2 gift falls out of 7-year rule and is outside the estate.  9^th Gift of £50,000 (cumulative total in 7 years is still £325,000 – to stay below the £325,000 meaning inheritance tax threshold not breached so no Taper Relief issues will come into play if you die)
• Year 10 – Year 3 gift falls out of 7-year rule and is outside the estate.  10^th Gift of £50,000 (cumulative total in 7 years is still £325,000 – to stay below the £325,000 meaning inheritance tax threshold not breached so no Taper Allowance issues will come into play if you die).  You then die in year 10 meaning £325,000 (cumulative gifts in last 7 years is included in your estate for IHT calculation) but gifts in year 1 to 3 are outside the estate).

And so on to keep falling outside the estate after the rolling 7-year periods but there is a catch where it could be 14 years.  See

PETs and 7 Year Rule: Inheritance Tax 7 Year Rule

PETs and 14 Year Rule: 7 and 14 Yr IHT Rule

Chargeable Lifetime Transfer [CLT]

• Inheritance Tax is not a Death Tax it is a Gift Tax, which is usually payable on death for larger estates but it may also be payable during life and is then known as a chargeable lifetime transfer (CLT).
• If you make gifts to a business or to most trusts, there are not PETs but they are CLTs.  Inheritance Tax on the value of the gift is payable at 20% (if you exceed the £325,000 nil rate band allowance cumulatively for all types of gift within the last 7 years).

Taper Relief

If you make gifts to individuals or bare trusts, they are PETs but if you exceed the £325,000 and you die, £325,000 will be included in your estate and potentially subject to 40% inheritance tax but any excess gifts over and above £325,000 may pay lower taxes as they benefit from Inheritance Tax Taper Relief.

See IHT Rates

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