Giving away things as a ‘one off’

Sometimes individuals have assets that are significantly above the Inheritance Tax allowance levels, and therefore want to give away larger amounts (more than the £3,000 annual amounts) as a one off transaction. For example, a couple that have total assets of £750,000 may want to give away £100,000 to their children, create a Trust Fund for their Grandchildren, or help out a family member by putting some money towards a house for them.

This type of larger gift is referred to in Inheritance Tax rules as P.E.T – a Potentially Exempt Transfer. The reason it is “potentially exempt” is that certain conditions have to be met before it is considered to be outside of your estate for Inheritance Tax purposes.

The main conditions are that you must sever any links to the asset and no longer derive any benefit from it (for example you can not give away your house to save Inheritance Tax but continue to live in it rent free, or you cannot give away money but still receive the interest from it) and you must also live seven years from the date of you making the gift before the Revenue accept that the value of the gift is outside of your estate.

In the earlier example, the couple who gifted £100,000 could potentially save their children £40,000 of unnecessary tax in this way if they make the gift, derive no benefit from it, and live seven years.

Once more, it is vital that if you are considering making a gift of this type, be it to an individual or to create a Trust Fund to hold the asset, that you take good advice before carrying out the transaction.