Definition of a potentially exempt transfer
The majority of 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 from Inheritance Tax if the taxpayer survives for more than seven years after making the gift. There is a tapered relief available if the donor dies between three and seven years after the gift is made.
The effective rates of tax on the excess over the nil rate band for PETs is:
- 0 to 3 years before death 40%
- 3 to 4 years before death 32%
- 4 to 5 years before death 24%
- 5 to 6 years before death 16%
- 6 to 7 years before death 8%
HMRC’s internal Inheritance Tax manual states that subject to certain exceptions, a PET is a lifetime transfer of value that satisfies three conditions. They are that:
- the transfer is by an individual on or after 18 March 1986
- it would be a chargeable transfer apart from IHTA84/S3A (or, if only partly chargeable, is a PET to the extent that it would be chargeable), and
- it is a gift to another individual or to a specified trust.