Learn about Potentially Exempt Transfers (PETs) and Chargeable Lifetime Transfers (CLTs), their interaction with each other and the impact these gifts have on Inheritance Tax (IHT).
Discover why making gifts in a specific order is important and what the ‘14 year rule’ actually means.
Two main considerations when planning the IHT position of gifts are:
- the tax position whilst the individual is alive
- the tax position after the individual has died
Other considerations include:
- the value of the gifts – gifts above a certain amount may impact the availability of the nil rate band on subsequent gifts or could cause an IHT liability.
- the type of gift – the value that can be transferred as a PET is unlimited and PETs will drop out of the estate provided the donor survives for 7 years.
CLTs may be chargeable immediately if the accumulated CLTs are more than the nil rate band.
as well as PETswill complicate matters and their interaction with one another should be examined.
successionof gifts and the order in which they are made – consideration should be given to the interaction of the types of gift and if previous gifts cause an impact on the current gift.
- the position if the settlor/donor dies within 7 years of making the gift /s – although PETs are unlimited, they will become chargeable to IHT if the individual making the gift dies within 7 years of doing so.
Likewise, CLTs are also brought into the IHT calculation on death within 7 years. CLTs in excess of the nil rate band, where an entry charge was paid, will need
recalculatedat the death rate of 40% and any excess tax paid.
CLTs made in the 7 years before a “failed PET” will also have an impact on the IHT calculation of the PET.