Lifetime gifting of money (also known as transfers) can be a very simple and effective way to mitigate your IHT exposure. There are three types of transfers that exist for IHT purposes:
- Potentially Exempt Transfers (PET)
- Exempt Transfers
- Chargeable Transfers
Exempt Transfers and PETs are free of IHT, providing certain conditions are met. Chargeable transfers are more likely to be subject to IHT, so we haven’t considered them here.
Potentially Exempt Transfers
Any gift you make to someone who isn’t your spouse/civil partner will be classed as a PET for IHT purposes.
A PET is treated as an exempt transfer if you survive seven years from the date of the gift. If you die within those seven years, the gift will become chargeable and a potential IHT charge could be payable by the recipient of the gift. The IHT charge can be reduced by a tapering relief (and other available reliefs if you qualify) – this reduces the IHT liability by a specific percentage depending on the time between the gift and the date of death. The relevant percentages are:
| Years from when gift is made | Taper relief |
| 3-4 | 20% |
| 4-5 | 40% |
| 5-6 | 60% |
| 6-7 | 80% |
So, if death occurs 5 years after the gift, then the IHT due is reduced by 60%.
If you’re in good health both financially and physically then this could be a very efficient way to reduce the IHT exposure on your estate.
Exempt Transfers
There are certain transfers which are fully exempt from IHT. These include:
- Gifts to your spouse/civil partner
- Gifts to UK and EEA charities, political parties, housing associations or national heritage bodies
- Small gifts (up to £250 per person, per year)
- Gifts on marriage (£5,000 to a child, £2,500 to a grandchild or £1,000 to anyone else)
- Gifts out of surplus income (surplus income is income left over after all regular outgoings. Gifts must be part of your normal expenditure and cannot impact your standard of living or be paid from capital)
- Gifts up to the annual exemption (£3,000)
Both exempt transfers and PETs are subject to certain conditions, and you should seek professional advice before giving away any significant sums of money. It’s also important to keep a record of any gifts made.
Questions
If you have any IHT queries or would like more information on lifetime transfers, please contact our Personal Tax Team.
