When planning on what to leave to your loved ones when you’re no longer here timing can be key.  In some situations, giving property, possessions or money away ahead of time can be a lovely gesture, giving you time to watch your beneficiaries enjoy what you leave them.  It can also potentially bring with it inheritance tax efficiencies, but only if the timing is right.

Our previous inheritance tax blog looked at when a gift is not actually a gift, what is called a gift with reservation of benefit.  But what does a gift that “potentially is a gift” look like?

Potentially Exempt Transfer (PET)

A potentially exempt transfer “a 7 year gift” is one that many people will be aware of, and where the time factor of seven years is important.

A PET is where we do actually make a gift, a real gift, to an individual or to certain kinds of trust. (Trusts are definitely a topic for another day!)

The key element being, that must be an outright gift, in contrast to a gift with reservation.  There cannot be anything left, benefit or otherwise, it must be given absolutely.

When you have given away the capital absolutely, the seven-year clock begins.

Taper Relief

 

In this seven-year period, the rate of tax that your executors have to pay on behalf of your beneficiaries reduces over time, in other words, it “tapers off” as the years progress.

Should the person making the gift become deceased during the first three-years the rate of tax on the taxable element of the gift would be 40%.

Years between transfer and death	Percentage of full tax rate	Rate of tax applied
0 to 3	100	40%
3 to 4	80	32%
4 to 5	60	24%
5 to 6	40	16%
6 to 7	20	8%
7 onwards	0	0%

Example

 

Julia makes a gift of £375,000 on 1 February 2009. She dies on 20 June 2012.

£50,000 of the gift exceeds the £325,000 nil rate band.

Full rate of tax on the gift: 40% × £50,000 = £20,000

The gift is within 3 to 4 years of the death, so taper relief allows you to charge tax at 80% of the full rate.

Revised tax charge: £20,000 × 80% = £16,000 (the relief is £4,000).

The advantage here being that after the seven-years that gifted capital has been fully removed from the estate, reducing the overall estate value and reducing the inheritance tax implications.

Financial Planning

 

There are however some questions to be asked before making a PET, particularly a substantial one, such as in the example above. Clearly the disadvantage is it’s not your money anymore. You can’t spend it.  You cannot control it either – you have gifted it absolutely.

This is where it becomes important to reach out to a financial planner, gain advice, and make supported plans for the future based on informed decisions that encompass the long term viability of making a gift, and the level of control necessary – which brings us back around to trusts – one for another time!

Taylormade Financial Management is a long established Independent Financial Advisory practice and well equipped to help clients chart the turbulent waters that surround budget announcements.  Our mission is to provide first-class financial planning advice to individuals, companies and trustees.

Important Disclosure: content provided does not consider individual circumstances and does not constitute personal advice.  The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.