Your mother gifted you £250K six years ago. She died

recently and the Taxman is demanding the full amount of

IHT on the gift. You were told that IHT was reduced on

gifts made three years before death, so what’s going on?

 

IHT and gifts

 

A gift from one person to another is a Potentially

Exempt Transfer (PET) unless it is already exempt. A PET is fully exempt from IHT if the giver survives at

least seven years from the date of the gift. But what if

the giver survives fewer years?

 

Taper relief

 

Section 7 of the Inheritance Taxes Act 1984 says that if a person survives more than three years from the date of gift, then the IHT on that gift will be reduced in accordance with the following table:

 

Years survived since gift	% of full IHT rate payable
Less than 3	100%
3 to 4	80%
4 to 5	60%
5 to 6	40%
6 to 7	20%

 

 

Example

 

Mrs X dies in December 2008. just over five years earlier she made gifts to her children, these were PETs. However, as she did not survive seven years after making the gifts they have become chargeable to IHT on her death.

 

As she survived between five and six years after making the gifts, the IHT due on these is reduced to 40% of the full amount.

 

Sting in the tale

 

Example

 

Let’s assume that nearly seven years ago your father’s estate was worth £750,000 and so as part of his IHT planning he made a gift of £250,000 to you (he had not made any gifts previously). Unfortunately, he died recently. The IHT on the gift would appear to be £100,000 (IHT full rate is 40%, so on £250,000 that’s £100,000 tax). However, you would expect a reduction in the IHT because he survived more than three years form the date of the gift. Actually, there would be no reduction in the tax at all. But why is that?

 

Timing

 

Taper relief only reduces the amount of tax payable, thus if there is no tax payable on a PET, it follows that there can be no taper relief.

 

Trap

 

There are special rules for working out IHT when a PET becomes chargeable. These say that the IHT on a PET is calculated before the rest of the estate. As the first part of an estate is chargeable at 0%, known as the nil-rate band (NRB), then if a PET is less than the NRB (currently £312,000) then there will be no IHT due on it, and so taper relief will have no effect.

 

Therefore, the effect of making a PET with a value less than the NRB within seven years of death is that it will not reduce your IHT. So is there an alternative to making a gift?

 

Tip

 

You can purchase term assurance (for seven years) that will cover the potential IHT bill on PETs.

 

Tip

 

‘Discount gift schemes’ are an insurance product that can remove some of the value of a gift from your estate immediately.