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I'm just writing a section in the Tax chapter of my book about Inheritance Tax and trying to do research on Potentially Exempt Transfers (PETs) vs Chargeable Transfers.
I read somewhere that you can only give away up to £325,000 within any seven year period before such gifts incur tax. Surely that's not right? I always thought you could give any amount to your own children tax free, so long as you survive 7 years!
"It is the small decisions you and I make every day which shape our destinies." Anthony Robbins
You can give any amount away and if you survive 7 years no IHT is payable. I think you are confusing with if you put the money into a trust where different rules apply and may be considered a chargeable lifetime transfer.
Taper relief is very complicated so I don't want to get into specifics what I will say is:
Up to £325,000 can be given away by an individual with no tax as this could be deemed to part of the zero rated allowance on death at any point in time. However over that £325,000 amount, that is where the taper relief comes in. So if you gave your child a house worth £500,000, £325,000 could be zero rated from day one but the balance would have a tapered liability for the next 7 years.
Does that make a little more sense?
Landlord with 25 years’ experience in the property market and a specialist in tenant referencing, ID and credit screening. Creator of identity, credit and anti-money laundering system ValidID.co.uk
I see what you're saying about tapering .
I believe beyond that it becomes a Chargeable Transfer, but the tax on that is at 20% as opposed to the 40% Inheritance Tax level... Is that right?Thanks,Angela
This is why many people establish various trusts with life interests etc to avoid CTs and such like.
The other issue you have to consider is CGT especially where property is involved because giving it away is classed as a chargeable event.
And this is the reason I said I didn't want to get too into it, it is a minefield, extremely complicated and I was qualified in IHT planning up until 2012 so go figure!
I appreciate your replies. I'm sure it can get endlessly complicated in detail, like most things - especially tax.
I hope it's a worthy endeavour to try and understand this matter at least to a basic level though.
I am aware of the CGT implications, but thanks for bringing that up as it's definitely worth noting. (That's not an easy factor to consider either, as arguably I may well have sold the property at some stage whether gifted or not, so incurred CGT anyway).
I hardly dare ask about trusts then, if you're already reluctant to get into this (lol, or anyone else?) but so - is it possible that I could put more of my estate into trust than the £325k PET limits and thereby avoid IHT completely (/potentially)?
I am definitely not getting into trusts haha, even I used a trust expert when I was an adviser as they are far more complicated than IHT. Trusts are like prescribing medicine each recommendation can be different for each patient.
Good luck with the book would love to have a look at it when you're finished, we never stop learning ;-)
Thanks Chris - you've been very helpful! Crikey, trusts sound like a nightmare!
Ideally the whole book would've been written by experts - not me! But then I guess it would've been an unpalatable encyclopaedia and that's the only basis on which I can justify even giving it a shot :-)
I had thought of getting a tax expert to write this chapter but I think they'd all probably run a mile lol, saying it's all too complicated!
A Potentially Exempt Transfer (PET) is a transfer to any individual during your lifetime. It is called Potentially Exempt because it only becomes exempt if you survive 7 years after making the transfer. If you do not survive 7 years then the transfer falls back into your estate on death and the level of tax due on the transfer depends upon various factors including what other transfers took place at the same time as well as how far through the 7 years you have got to.
Accordingly you could gift all of your properties in one go and so long as you live 7 years they are no longer caught for IHT. However you should also be aware of Pre Owned Asset Tax (introduced in 2005) which could bring them back into IHT in your estate if you have use of the properties plus on the transfer the properties you still need to consider Capital Gains Tax and SDLT as these may give rise to a tax charge.
There is also possibly a question over whether the gift was made inclusive or exclusive of the estate paying the IHT. To explain further, when you make a gift you can do so on the understanding that the estate will pay any associated IHT or the person receiving the gift will pay the IHT.
In about 2015 the legislation on making gifts to Trusts was changed so that they are no longer treated as PET's and you only get one go at the £325,000 nil rate band with them. The reason for this is that we were setting up a trust to use the nil rate band then waiting 7 years and setting up another. The Government took exception to this and stopped us doing it so now you only get one go at using the nil rate band.
IHT like all taxes is not as simple as many people seem to think.
I hope the above helps.
I appreciate your reply and that it's complicated.
I know you have to survive 7 years for the PET to be valid (or tax due according to how long you survived).
Re: "There is also possibly a question over whether the gift was made inclusive or exclusive of the estate paying the IHT. To explain further, when you make a gift you can do so on the understanding that the estate will pay any associated IHT or the person receiving the gift will pay the IHT." I presume this means 'who pays IHT if due?'
Re trusts: ".In about 2015 the legislation on making gifts to Trusts was changed so that they are no longer treated as PET's and you only get one go at the £325,000 nil rate band with them... so now you only get one go at using the nil rate band." So does that mean basically they're not worth doing?
Hi Angela - I don't know IHT in detail but from reading through what Nigel has said and others and my own limited knowledge you're confusing this 325k limit.
There is no limit. you can transfer all your houses in one go not 325k every 7yrs. All are potentially exempt if you live 7yrs (except there might be some CGT or SDLT to pay - that sounds interesting to know how to work that out.....). Had you sold them you'd have to pay CGT on the assets so I assume whatever you'd have had to pay your children would have to pay if they sold them post inheriting. Would they have to pay any on inheriting? and can you gift them at low value to avoid SDLT? or is there redused SDLT on gifts from parents that are making PET's?
If you don't gift to your children but gift to a trust there's this 325k limit involved - is that correct?
regards Andrew Peers - property investor / sourcer - 07912674181