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IHT gifts – 7 year limit

18 January 2024

Gifts made during one's life are known as Potentially Exempt Transfers (PETs) for Inheritance Tax. Tax-free after 7 years, but tapered relief applies within 3 to 7 years. Keep a record for effective estate planning.

Most gifts made during a person’s life are not subject to tax at the time of the gift. These lifetime transfers are known as ‘potentially exempt transfers‘ or ‘PETs’. These IHT gifts or transfers achieve their potential of becoming exempt if the taxpayer survives for more than 7-years after making the gift. If the taxpayer dies within 3-years of making the IHT gift, then the inheritance tax position is as if the gift was made on death. A tapered relief is available if death occurs between 3 and 7 years after the gift is made.

The effective rates of tax on the excess over the nil rate band are:

  • 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%

These tapered rates cannot reduce the tax due on a lifetime chargeable transfer below the amount chargeable when the transfer was made and so are of no benefit to a transfer within the nil rate band.

We would strongly recommend that you keep a list of any PETs (IHT gifts) that you make. It is also important to keep a record of any exemptions that are used as well as details of any regular gifts made out of surplus income.

Source: HM Revenue & Customs Tue, 16 Jan 2024 00:00:00 +0100

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