It is widely known that when assets are gifted by one person to another a potentially exempt transfer (PET) arises for Inheritance Tax (IHT) purposes. Once a donor has survived for seven years, the PET falls out of charge and can no longer affect the IHT payable by the estate. Whilst this is widely understood, it isn’t strictly correct!
The problem arises if there is a PET which fails (i.e. becomes chargeable due to the donor failing to survive for seven years). If that occurs, transfers made in the seven years prior to the date of the failed PET are indirectly brought into the computation also. In practice, this may mean that a recipient of a gift made (say) five years prior to death may face an IHT liability as a result of an earlier gift.
The planning point here is that until there is a clear period of seven years after a PET is made, it can be brought into account for IHT purposes and the resulting sum payable will depend on earlier PETs, if any have been made within seven years of the failed PET. Secondly, unless the donor survives the full seven years after making a gift, the recipient may face an IHT charge on it. The amount of that charge will depend on the amount and date of earlier gifts. Potentially, the final IHT position may be affected by a gift made any time within the 14 years before the date of death.
IHT planning needs to be approached with great care and should only be undertaken with expert professional advice – there are many pitfalls.