What is a potentially exempt transfer? Private Wealth

If there are no other exemptions available, an outright gift to an individual (called a “potentially exempt transfer” (PET)) might eventually fall out of charge to inheritance tax. They are so called, because if you (the donor) survive for seven years from the date of the gift, the gift becomes fully exempt.

If you fail to survive for seven years, then the gift becomes chargeable and will use up all or part of your nil rate band. However, the longer you survive after making the gift (subject to surviving at least three years), the lower the inheritance tax charge:

• If you survive between three to four years from the date of the gift, the IHT charge on the gift is reduced by 20 per cent.
• If you survive between four to five years from the date of the gift, the IHT charge on the gift is reduced by 40 per cent.
• If you survive between five to six years from the date of the gift, the IHT charge on the gift is reduced by 60 per cent.
• If you survive between six to seven years from the date of the gift, the IHT charge on the gift is reduced by 80 per cent.

Note that it is the IHT charge that is reduced, not the value of the gift (which reduces the nil rate band by the full amount).