Gifts and Inheritance Tax

Most gifts made during a person’s lifetime are not subject to tax at the time of transfer. These gifts, known as “potentially exempt transfers” (PETs), can become fully exempt if the donor survives for more than seven years after making the gift.

If the donor passes away within three years of the gift, the inheritance tax is treated as if the gift was made upon death. A tapered relief applies if death occurs between three and seven years after the gift, reducing the tax liability based on the time elapsed.

The effective tax rates on the amount exceeding the Inheritance Tax nil rate band are as follows:

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%7 or more years before death: 0%

However, these tapered rates do not reduce the tax on a lifetime chargeable transfer below the amount initially chargeable and offer no benefit for transfers within the nil rate band.

We strongly recommend maintaining a record of any PETs you make, including details of exemptions used and any regular gifts made out of surplus income.