Firstly, a reminder of gifting money or assets as potentially exempt transfers (PET) i.e., it is outside your estate after 7 years and also chargeable lifetime transfers (CLT) where CLTs made are cumulatively below inheritance tax nil rate band (£325,000) then no tax to pay initially but above that, inheritance tax (or ‘gift tax’ as we call it) is payable on the day you make the gift.
Potentially Exempt Transfer (PET)
You can gift larger lump sums of more than £3,000 e.g., £200,000, or even £500,000, provided these are gifted to individuals or bare trusts, these are Potentially Exempt Transfers (PET).
If you live for 7 years or more, the PET gift or the transfer is outside your estate after 7 years and not subject to inheritance tax.
If you gift as a PET but you died within 7 years, then the whole value of the gift is included in the inheritance tax calculation as it is a Failed PET, it becomes a chargeable lifetime transfer.
Chargeable Lifetime Transfer (CLT)
If you gift money, to a discretionary trust or an interest in possession trust or a business, it is not a PET. It is a Chargeable Lifetime Transfer (CLT).
You can gift as many CLT amounts as you wish but as soon as you cross the inheritance tax threshold of £325,000 then Chargeable Lifetime Transfer Inheritance Tax is payable at 20% even though you are still alive. Remember, inheritance tax is a ‘gift tax’ and not a ‘death tax’.
01/10/2008 – Fred gifts/transfers £225,000 to a Discretionary Trust. This is a Chargeable Lifetime Transfer (CLT) but below the £325,000 Inheritance Tax Nil Rate Band so no 20% Lifetime Transfer Inheritance Tax.
01/09/2015 – Fred gifts/transfers £300,000 to his daughter just 6 years and 11 months after the CLT above. The £300,000 is a Potentially Exempt Transfer (PET) so provided Fred lives for 7 years then £300,000 is outside the estate for inheritance tax.
18/08/2022 – Fred dies.
Fred has died after 6 years 11 months and 17 days of the gift to his daughter. Fred has not survived for 7 years after this gift. This means that the £300,000 fails as a PET. A failed PET is now a Chargeable Lifetime transfer at the time it was gifted on 01/09/2015 and catches the original CLT to the trust as this was made just 6 years and 11 months before the 2nd gift. When adding back £300,000 to the first CLT of £225,000, this is now £525,000 in CLTs which any excess over the £325,000 nil rate band is subject to inheritance tax i.e., £200,000.
You can see now that the 7-year is actually an ‘up to 14-year rule’.
Tax Calculation: Stage 1
Tax Calculation: Stage 2
Inheritance tax payable = £80,000 IHT bill less taper relief £64,000 = £16,000 tax payable.
We repeat the 7-year is actually an ‘up to 14-year rule’. In the above example it was gifts made 13 years and 11 months ago that affected the inheritance tax liability.
Two Suggestions (if possible)