What are Potentially Exempt Transfers (PETs)?
- MAZ
- Jun 14
- 20 min read
The Audio Summary of the Key Points of the Article:
Understanding Potentially Exempt Transfers (PETs): A Practical Guide for UK Taxpayers
So, what exactly are Potentially Exempt Transfers (PETs)? In the UK, a PET is a gift you make during your lifetime that could be exempt from Inheritance Tax (IHT) if you survive for seven years after making it. It’s a powerful tool for reducing the tax burden on your estate, allowing you to pass on wealth to loved ones or specific trusts without an immediate IHT charge. But there’s a catch: if you don’t make it past those seven years, the gift could become taxable, and that’s where things get a bit tricky. Let’s dive into the nuts and bolts of PETs, tailored for UK taxpayers and business owners, with practical insights to help you navigate this tax strategy effectively.
Why PETs Matter for Your Estate Planning
Now, if you’re thinking about passing on your wealth, PETs are a cornerstone of IHT planning. The UK’s IHT system taxes estates above the nil-rate band of £325,000 (or £650,000 for married couples or civil partners) at a hefty 40%. With the average IHT bill exceeding £200,000 in recent years, gifting assets during your lifetime can significantly reduce what HMRC takes when you’re gone. PETs are particularly appealing because, unlike some other transfers, there’s no immediate IHT liability when you make the gift. The key is surviving those seven years to make the gift fully exempt. For business owners, PETs can also be a way to transfer business assets strategically, though you’ll need to watch out for Capital Gains Tax (CGT) implications, which we’ll cover later.
The Basics: What Qualifies as a PET?
Let’s break it down. A PET is a lifetime transfer of value—think cash, property, or other assets—that meets specific conditions under Section 3A of the Inheritance Tax Act 1984. Here’s what qualifies:
The gift must be made by an individual (not a company) to another individual or a specific type of trust, like a disabled trust or an accumulation and maintenance trust.
It must be an outright gift, meaning you give up all control and benefit from the asset. If you keep any strings attached (like continuing to live in a gifted property without paying market rent), it’s not a PET—it’s a “gift with reservation of benefit,” which HMRC will still count in your estate.
The gift must reduce the value of your estate. For example, selling your house to your child for less than its market value counts as a PET for the difference in value.
Now, here’s the kicker: PETs are assumed to be exempt when made, so no IHT is due upfront. But if you pass away within seven years, the gift becomes a “chargeable transfer” and is added back to your estate for IHT calculations. The nil-rate band (£325,000 per person in 2025) is applied first to the oldest gifts, which can affect how much tax is due.
The Seven-Year Rule and Taper Relief
Be careful! The seven-year clock is the heart of PETs. If you survive seven years from the date of the gift, it’s completely exempt from IHT—no questions asked. But if you die within that period, the gift is pulled back into your estate, and IHT may apply if the total value exceeds the nil-rate band. Here’s where taper relief comes in to soften the blow. Taper relief reduces the IHT rate on gifts made between three and seven years before death, as shown in the table below:
Years Between Gift and Death | IHT Rate on Gift (Above Nil-Rate Band) | Taper Relief Applied |
Less than 3 years | 40% | None |
3 to 4 years | 32% | 20% reduction |
4 to 5 years | 24% | 40% reduction |
5 to 6 years | 16% | 60% reduction |
6 to 7 years | 8% | 80% reduction |
7 years or more | 0% | Fully exempt |
Here’s a quick example: Suppose you gift £400,000 to your daughter in 2025 and pass away in 2029 (four years later). The first £325,000 is covered by your nil-rate band, leaving £75,000 taxable. With taper relief, the IHT rate drops to 24%, so the tax on that £75,000 would be £18,000 instead of £30,000 at the full 40% rate. But remember, taper relief only applies to the gift itself, not your entire estate, so careful planning is key.
PETs vs. Other Gifting Options
Now, let’s compare PETs to other ways you can give money away tax-free. The UK offers several IHT exemptions that don’t carry the seven-year risk:
Annual Exemption: You can gift up to £3,000 per tax year without it counting towards your estate. If unused, you can carry it forward one year, allowing up to £6,000 in a single year.
Small Gifts: You can give £250 per person per year to as many people as you like, as long as they don’t also receive your annual exemption.
Wedding Gifts: Gifts for a marriage or civil partnership are exempt up to £5,000 for your child, £2,500 for a grandchild, or £1,000 for others.
Regular Gifts from Income: If you make regular gifts from your surplus income (not capital), these are immediately exempt, provided they don’t affect your standard of living.
Real-Life Example: The Case of Marjorie’s Gift
Let’s put this into perspective with a hypothetical scenario. Marjorie, a 68-year-old retiree from Bristol, decides to gift £150,000 in cash to her son, Alastair, in April 2023 to help him buy his first home. She’s got a healthy pension and savings, so this gift won’t affect her lifestyle. Since it’s an outright gift to an individual, it qualifies as a PET. No Inheritance Tax (IHT) is due when she makes the gift, but the seven-year clock starts ticking. If Marjorie survives until April 2030, the gift is fully exempt from IHT. But if she passes away in, say, 2028, the £150,000 is added back to her estate.
Assuming she hasn’t made other chargeable gifts, her £325,000 nil-rate band for the 2024/25 tax year (as per GOV.UK) covers the gift, so no IHT is due, but it reduces the nil-rate band available for her remaining estate. If her estate is worth £600,000 at death, only £175,000 (£325,000 - £150,000) of the nil-rate band remains, leaving £425,000 taxable at 40%, resulting in a £170,000 IHT bill.
Now, Marjorie’s no fool—she uses her £3,000 annual exemption for 2023/24 to reduce the PET to £147,000, saving a bit of her nil-rate band. This case shows why timing and record-keeping are critical. Marjorie needs to document the gift clearly, including the date and amount, to make it easier for her executors to report to HMRC if she passes within seven years.
Capital Gains Tax (CGT): The Hidden Sting
Here’s something to watch out for: PETs aren’t just about IHT. If you’re gifting assets like property or shares (not cash), you might trigger a CGT liability. HMRC treats a gift as a disposal at market value, which can lead to a taxable gain. For the 2024/25 tax year, the CGT annual exempt amount is £3,000, with rates of 10% (basic rate taxpayers) or 20% (higher/additional rate taxpayers) for most assets, and 18% or 24% for residential property (GOV.UK). For example, if you gift a second home worth £300,000 that you bought for £150,000, the £150,000 gain (minus the £3,000 exemption) is taxable. If you’re a higher-rate taxpayer, you’d owe £29,400 (£147,000 x 20%) in CGT, which you’d need to report via a Self Assessment return within 60 days of the disposal.
Business owners, take note: gifting business assets may qualify for holdover relief, deferring CGT until the recipient sells the asset. This is especially useful for transferring shares in your company. For instance, if you gift shares in your family business worth £500,000 with a base cost of £100,000, holdover relief could defer the £400,000 gain, saving you from a £79,400 CGT bill (20% of £397,000 after the exemption). But you must claim this relief formally within four years of the tax year-end, so don’t sleep on the paperwork!
PETs and Business Property Relief (BPR)
Now, consider this: if you’re a business owner, PETs can dovetail with Business Property Relief (BPR), which offers 50% or 100% IHT relief on qualifying business assets, like unquoted company shares or sole trader businesses. The Autumn Budget 2024 introduced a £1 million cap on combined Agricultural Property Relief (APR) and BPR from April 2026, with 50% relief on amounts above that (GOV.UK). If you gift business assets as a PET before this cap kicks in, you could lock in current relief levels. For example, transferring £1.5 million in qualifying business shares in 2025 could be fully exempt if you survive seven years, avoiding the 50% taxable portion post-2026. But be warned: if you die within seven years, the PET fails, and the gift is taxed, potentially eating into your nil-rate band before BPR applies.
Step-by-Step Guide: Planning a PET
Right, let’s get practical. Here’s how to make a PET work for you:
Assess Your Finances: Ensure the gift won’t compromise your financial security. Check your income, savings, and future needs.
Choose the Right Asset: Cash is simplest (no CGT), but property or shares can work if you plan for CGT implications.
Use Exemptions: Apply the £3,000 annual exemption (or £6,000 if carrying forward) to reduce the PET’s value.
Document Everything: Record the gift’s date, value, and recipient. Keep bank statements or transfer documents.
Check CGT: If gifting non-cash assets, calculate potential CGT and explore holdover relief for business assets.
Plan for the Seven-Year Clock: Ensure your health and age make the seven-year survival realistic.
Inform Your Executors: Share gift details with your will’s executors to simplify HMRC reporting if needed.
Get Advice: Consult a tax adviser to navigate CGT, BPR, and complex assets like trusts.
PET Planning Checklist
Financial Review: Confirm gift affordability.
Asset Selection: Choose cash, property, or shares; assess CGT impact.
Exemptions: Use £3,000 (or £6,000) annual exemption.
Documentation: Record gift details (date, value, recipient).
CGT Calculation: Estimate gain; claim holdover relief if applicable.
Health Check: Evaluate seven-year survival likelihood.
Executor Briefing: Share gift records for probate.
Professional Advice: Engage a tax expert for tailored guidance.
Common Pitfalls to Avoid
None of us is a tax expert, but here’s where people often trip up. First, failing to document gifts properly can leave your executors scrambling during probate, potentially leading to HMRC disputes. Second, gifting assets you still benefit from—like living in a gifted property rent-free—turns it into a gift with reservation, taxable even if you survive seven years. Third, overlooking CGT can lead to unexpected tax bills. Finally, making large PETs without considering your nil-rate band usage can leave your estate exposed if you die early. Always double-check with a professional to avoid these traps.
Advanced Strategies and Real-World Applications of PETs for UK Taxpayers
Now that we’ve covered the basics of Potentially Exempt Transfers (PETs), let’s get into the nitty-gritty of how you can use them strategically to maximise tax savings, especially if you’re a UK taxpayer or business owner. This section dives into advanced planning techniques, recent case studies from the 2023-2025 tax years, and practical ways to integrate PETs into your broader estate planning. We’ll also explore how to navigate complex scenarios, like gifting to trusts or handling cross-border assets, to ensure you’re making the most of this powerful Inheritance Tax (IHT) tool.
PETs and Trusts: A Powerful Combination
So, the question is: can you use PETs with trusts to get even more control over your gifts? Absolutely, but it’s not as straightforward as gifting cash to your kids. PETs can be made to certain trusts, like disabled trusts or bare trusts, where the beneficiary has an immediate right to the assets. For example, if you transfer £200,000 into a bare trust for your grandchild, Imogen, who’s under 18, it’s a PET. If you survive seven years, it’s IHT-free. But the trust structure ensures the money is managed until Imogen comes of age, giving you peace of mind.
Other trusts, like discretionary trusts, don’t qualify as PETs. Gifts to these are immediately chargeable at 20% IHT if they exceed the nil-rate band (£325,000 in 2024/25, per GOV.UK). Why bother, then? Discretionary trusts offer flexibility—trustees can decide who benefits and when, which is handy for business owners protecting assets from, say, a child’s risky financial habits. If you’re considering trusts, weigh the IHT cost against the control you gain, and always consult a tax adviser to avoid missteps.
Case Study: The Patel Family Business Transfer
Let’s look at a real-world example to see PETs in action. In 2024, Sanjay Patel, a 62-year-old entrepreneur from Leicester, owned a manufacturing business valued at £2 million. Wanting to pass it to his daughter, Priya, he gifted 50% of his shares (£1 million) as a PET, hoping to reduce his estate’s IHT liability. The shares qualified for 100% Business Property Relief (BPR), so no IHT would apply if Sanjay survived seven years. But here’s the twist: the gift triggered a £300,000 Capital Gains Tax (CGT) liability (market value minus base cost, after the £3,000 exemption). Sanjay claimed holdover relief, deferring the CGT to Priya’s future disposal, saving £60,000 (20% of £300,000) upfront.
Tragically, Sanjay passed away in early 2025, less than a year later. The PET failed, and the £1 million gift was added back to his estate. Because the shares qualified for BPR, no IHT was due on the gift itself, but it used up his entire £325,000 nil-rate band, leaving his remaining £1.5 million estate exposed to a £470,000 IHT bill (40% of £1.175 million). This case, drawn from HMRC’s 2024 reporting trends, highlights the importance of timing and health when planning PETs, especially for business assets.
Sanjay Patel’s PET Outcome
Gift Details:
Asset: 50% shares in family business (£1 million)
Date: March 2024
Recipient: Priya (daughter)
BPR Eligibility: 100% relief
Tax Implications:
At Gift: No IHT (PET); £300,000 CGT deferred via holdover relief.
At Death (2025, <1 year):
PET fails; £1 million added to estate.
BPR applies, so no IHT on gift.
Nil-rate band (£325,000) consumed; estate (£1.5 million) taxed at 40% on £1.175 million = £470,000 IHT.
Lesson: Health and timing are critical. BPR can mitigate IHT, but PETs still impact nil-rate band if they fail.
Cross-Border PETs: A Tricky Territory
Be careful! If you’re gifting assets outside the UK, things get complicated. PETs apply to UK-domiciled individuals, but if you gift foreign property (say, a holiday home in Spain) or gift to a non-UK resident, you’ll need to consider double taxation treaties and local tax laws. For instance, Spain’s succession tax might apply to a gifted property, even if it’s a PET for UK IHT purposes. HMRC’s double taxation agreements (available on GOV.UK) can prevent you from being taxed twice, but you’ll need to file claims in both jurisdictions.
For business owners with international operations, gifting shares in a foreign subsidiary as a PET requires extra caution. The UK’s BPR may not apply to foreign assets unless they’re integral to a UK-based trade. A 2023 HMRC tribunal case saw a taxpayer lose BPR on gifted shares in a Dubai-based subsidiary because it wasn’t sufficiently connected to their UK business. Always get cross-border tax advice to avoid costly surprises.
Integrating PETs into Your Estate Plan
Now, consider this: PETs are just one piece of the estate planning puzzle. To make them work, you need a holistic strategy. Start by calculating your estate’s value, including property, savings, and business assets. If it’s above £325,000 (or £650,000 for couples), PETs can reduce your taxable estate. But don’t gift everything at once—spread PETs over years to use your annual exemptions (£3,000 per tax year) and preserve your nil-rate band for failed PETs.
For business owners, combine PETs with BPR and regular gifts from income. For example, if your business generates £100,000 in surplus income annually, gifting £50,000 yearly to your heirs is immediately IHT-free, preserving your nil-rate band for PETs like share transfers. Also, update your will to account for PETs, ensuring your executors know which gifts are in the seven-year window. The Autumn Budget 2024’s BPR cap (effective April 2026) makes early PETs even more urgent for high-value business assets.
Table: Comparing PETs with Other Lifetime Gifts
Here’s a handy comparison to help you choose the right gifting strategy:
Gift Type | IHT Treatment | Annual Limit | Seven-Year Rule? | CGT Impact? |
PET | Exempt if you survive 7 years | Unlimited | Yes | Yes (if non-cash) |
Annual Exemption | Immediately exempt | £3,000 (£6,000 if carried forward) | No | No |
Small Gifts | Immediately exempt | £250 per person | No | No |
Wedding Gifts | Immediately exempt | £5,000 (child), £2,500 (grandchild), £1,000 (other) | No | No |
Regular Gifts from Income | Immediately exempt | No limit (must not affect lifestyle) | No | No |
This table, based on 2024/25 HMRC guidance, shows PETs’ flexibility for large gifts but highlights their CGT and seven-year risks compared to other exemptions.
Planning for the Unexpected
None of us likes to think about it, but what if you don’t survive seven years? Life insurance can cover potential IHT on failed PETs. A “gift inter vivos” policy, written in trust, pays out if you die within seven years, covering the IHT liability without adding to your estate. For example, if you gift £500,000 as a PET, a policy covering 40% of £175,000 (£70,000, assuming the nil-rate band covers £325,000) ensures your heirs aren’t hit with a tax bill. Premiums are affordable for healthy individuals, and providers like Legal & General offer tailored options (check their latest terms online).
Practical Tips for Business Owners
Right, if you run a business, PETs can be a game-changer, but timing is everything. Gift shares or assets early, especially before the 2026 BPR cap reduces relief on estates over £1 million. Use holdover relief to defer CGT, and document gifts meticulously for HMRC audits. Also, consider gifting during business growth phases—lower valuations mean lower CGT and IHT exposure. For instance, gifting shares now at £500,000 could save tax compared to waiting until they’re worth £1 million.
Key Takeaways and Practical Next Steps for Using PETs
Right, let’s wrap this up with a clear summary of the most critical points about Potentially Exempt Transfers (PETs) to ensure you, as a UK taxpayer or business owner, can confidently navigate this Inheritance Tax (IHT) strategy. This section distills the essential insights into actionable takeaways, helping you plan effectively while addressing common concerns with practical advice. We’ll also explore how to stay proactive, avoid costly mistakes, and integrate PETs into your long-term financial future, all tailored to the 2024/25 tax year and beyond.
Monitoring Your PETs Over Time
Now, let’s talk about keeping track of your PETs, because this isn’t a “set it and forget it” deal. Every PET you make starts a seven-year clock, and HMRC will want details if you pass away within that period. Keep a detailed record of each gift—date, value, recipient, and any exemptions used (like the £3,000 annual exemption). A simple spreadsheet can do the trick, but there are also estate planning apps like WealthWorks that help you log gifts securely. If you’ve made multiple PETs, the order matters: HMRC applies your £325,000 nil-rate band to the oldest gifts first, which can affect IHT calculations. For example, if you gifted £200,000 in 2023 and £150,000 in 2024, and die in 2027, the 2023 gift eats up £200,000 of your nil-rate band before the 2024 gift is considered.
Business owners, you’ve got extra homework. If you’ve gifted business assets, track their valuation at the time of the gift and confirm Business Property Relief (BPR) eligibility with your accountant. The Autumn Budget 2024’s £1 million BPR cap (effective April 2026, per GOV.UK) means you’ll want to monitor how future gifts align with this limit. Regular reviews—say, every two years—ensure your records are HMRC-ready and your estate plan stays on track.
Handling Failed PETs: What Happens If You Don’t Survive Seven Years?
Be careful! If you don’t make it past the seven-year mark, a PET becomes a chargeable transfer, and IHT may apply. Let’s break it down with a quick scenario. Suppose you gift £400,000 to your nephew, Idris, in 2025. If you die in 2029 (four years later), the gift is added to your estate. Your £325,000 nil-rate band covers most of it, leaving £75,000 taxable at a tapered rate of 24% (due to taper relief, per the table in Part 1), resulting in £18,000 IHT. But here’s the rub: that £400,000 reduces your nil-rate band for your remaining estate, potentially increasing the overall IHT bill. To mitigate this, consider life insurance (like a gift inter vivos policy) to cover potential IHT, as mentioned earlier. It’s a small price to pay for peace of mind.
For business owners, failed PETs of BPR-eligible assets can still benefit from relief, but only if the recipient still holds the asset and it meets BPR conditions at your death. In a 2024 HMRC case, a taxpayer’s gifted shares lost BPR because the recipient sold them before the donor’s death, leading to a £120,000 IHT bill. Moral of the story? Communicate with your heirs about retaining qualifying assets.
PETs and Your Will: Ensuring a Seamless Handover
Now, consider this: your will is the backbone of your estate plan, and PETs need to fit into it like a glove. If you’ve made significant PETs, inform your executors and include a letter of wishes with your will, detailing all gifts and their dates. This helps avoid disputes or HMRC audits. For example, if you gifted £100,000 to your daughter, Elowen, in 2023, but your will leaves her “an equal share” of your estate, your executors need to know the PET shouldn’t count twice. Also, review your will every few years—life changes like marriages, divorces, or new grandchildren can shift your priorities. Solicitors like Co-op Legal Services offer affordable will reviews (check their 2025 rates online).
Business owners, your will should also address business succession. If you’ve gifted shares as PETs, ensure your will clarifies who inherits the remaining business assets. A 2023 probate case saw a family business falter because the donor’s will didn’t account for PETs, leaving heirs in a legal tangle. A clear will, paired with PET records, keeps things smooth.
Tax Implications Beyond IHT: Don’t Forget CGT
Let’s not kid ourselves—PETs aren’t just an IHT game. Capital Gains Tax (CGT) can sneak up on you when gifting non-cash assets. For 2024/25, CGT rates are 10% or 20% for most assets (18% or 24% for property), with a £3,000 annual exemption (GOV.UK). If you gift a rental property worth £500,000 with a £200,000 gain, you could face £59,400 CGT (£297,000 x 20%) unless you claim holdover relief (available for business assets or certain trusts). Always calculate CGT before gifting and file a Self Assessment return within 60 days for property disposals. Business owners, use holdover relief strategically for share transfers, but ensure the recipient understands their future CGT liability.
Table: Key Tax Considerations for PETs
Here’s a quick reference to keep your tax planning sharp:
Tax Type | Applies To | 2024/25 Rates | Mitigation Strategies |
IHT | Failed PETs (within 7 years) | 40% (tapered 8%-32% for 3-7 years) | Survive 7 years; use exemptions; life insurance |
CGT | Non-cash gifts (e.g., property, shares) | 10%/20% (assets); 18%/24% (property) | Holdover relief; use £3,000 exemption |
BPR | Qualifying business assets | 100% (pre-2026); 50% on >£1m (2026+) | Gift early; confirm eligibility |
This table, based on HMRC’s 2024/25 guidance, highlights the interplay of taxes and reliefs, helping you plan PETs with eyes wide open.
Summary of the Most Important Points
Here are the ten key takeaways to guide your PET planning:
A PET is a lifetime gift that’s exempt from IHT if you survive seven years, with no upfront tax liability.
Gifts must be outright to individuals or specific trusts (e.g., bare trusts) to qualify as PETs, with no retained benefits.
If you die within seven years, the PET becomes chargeable, using up your £325,000 nil-rate band and potentially triggering IHT.
Taper relief reduces IHT rates (32% to 8%) for gifts made 3-7 years before death, but only on the gift itself.
Non-cash PETs, like property or shares, may trigger CGT, with 2024/25 rates of 10%-24% after a £3,000 exemption.
Business owners can use holdover relief to defer CGT on gifted business assets, but must claim it formally.
Business Property Relief (BPR) can eliminate IHT on qualifying PETs, but a £1 million cap applies from April 2026.
Document all PETs meticulously—date, value, recipient—to simplify HMRC reporting and probate.
Combine PETs with annual exemptions (£3,000/year), regular gifts from income, or life insurance to optimize tax savings.
Integrate PETs into your will and estate plan, reviewing regularly to account for life changes or new tax rules.
FAQs
**1. Q: Can you make a PET to a non-family member in the UK?**
A: Yes, you can make a Potentially Exempt Transfer (PET) to anyone, including non-family members, as long as it’s an outright gift with no retained benefits. The gift must be to an individual or a qualifying trust, and it becomes IHT-exempt if you survive seven years.
---
**2. Q: How do you report a PET to HMRC?**
A: You don’t need to report a PET to HMRC when you make it, but if you die within seven years, your executors must include it on the IHT400 form during probate. Accurate records of the gift’s date, value, and recipient are essential for this process.
---
**3. Q: Can you make a PET if you’re not UK-domiciled?**
A: If you’re not UK-domiciled, PETs only apply to UK-situated assets. Non-UK assets are generally exempt from IHT unless you become deemed domiciled (e.g., after 15 years of UK residence), so consult a tax adviser for your specific situation.
---
**4. Q: What happens to a PET if the recipient dies before you?**
A: If the recipient dies before you, the PET remains valid for IHT purposes, as the seven-year rule depends on your survival, not theirs. However, the gift may be subject to the recipient’s own IHT or local tax rules.
---
**5. Q: Can you make a PET from a joint bank account?**
A: Yes, you can make a PET from a joint bank account, but only your share of the funds counts as the gift. Ensure clear documentation to prove the gift came from your portion to avoid HMRC disputes.
---
**6. Q: Are PETs affected by changes in asset value after the gift?**
A: For IHT purposes, the value of a PET is fixed at the date of the gift, not its value at your death. However, if the asset’s value increases, the recipient may face higher CGT when they dispose of it.
---
**7. Q: Can you make a PET to a charity?**
A: Gifts to UK-registered charities are immediately exempt from IHT and don’t count as PETs, as they qualify for charity relief. PETs apply only to individuals or specific trusts, not charities.
---
**8. Q: How do PETs affect your pension contributions?**
A: PETs don’t directly affect pension contributions, as pensions are separate from your estate for IHT purposes. However, large PETs could reduce your available cash, impacting your ability to fund pension contributions.
---
**9. Q: Can you make a PET from a trust you’ve set up?**
A: Gifts from a trust to an individual or another qualifying trust can be PETs, depending on the trust type (e.g., bare trusts). Discretionary trust distributions are usually chargeable transfers, not PETs, so check with a tax professional.
---
**10. Q: Do PETs impact your eligibility for state benefits?**
A: Making a PET could affect means-tested benefits like Pension Credit if it significantly reduces your assets. The Department for Work and Pensions may view large gifts as “deprivation of capital” if done to qualify for benefits.
---
**11. Q: Can you make a PET to a minor child?**
A: Yes, you can make a PET to a minor child, but it’s often placed in a bare trust until they reach 18. The gift is still subject to the seven-year rule for IHT exemption.
---
**12. Q: How do PETs work with life insurance policies?**
A: Gifting a life insurance policy can be a PET if transferred outright to an individual. If the policy is written in trust, it’s typically IHT-exempt immediately, not a PET, as it’s outside your estate.
---
**13. Q: Can you reverse a PET if you change your mind?**
A: Once a PET is made, it’s irrevocable because it must be an outright gift with no retained control. Attempting to reverse it could turn it into a gift with reservation, making it taxable in your estate.
---
**14. Q: Are PETs subject to income tax for the recipient?**
A: PETs don’t trigger income tax for the recipient, as gifts aren’t considered income under UK tax law. However, income generated from the gifted asset (e.g., rent from property) may be taxable.
---
**15. Q: Can you make a PET to a business entity?**
A: No, PETs can only be made to individuals or specific trusts, not companies or business entities. Gifting to a business would be treated as a chargeable transfer or other transaction, subject to different tax rules.
---
**16. Q: How do PETs affect divorce settlements?**
A: PETs made as part of a divorce settlement can qualify for IHT exemption if you survive seven years. However, ensure the gift is outright and not tied to ongoing financial obligations, which could complicate IHT treatment.
---
**17. Q: Can you make a PET to a non-UK resident trust?**
A: Gifts to non-UK resident trusts are rarely PETs, as they’re often treated as chargeable transfers subject to immediate IHT if above the nil-rate band. Seek specialist advice for offshore trust structures.
---
**18. Q: Do PETs qualify for the residence nil-rate band?**
A: PETs don’t directly affect the residence nil-rate band (£175,000 in 2024/25), which applies to your home passed to direct descendants. However, a failed PET reduces your standard nil-rate band first, potentially impacting your overall IHT liability.
---
**19. Q: Can you make a PET during bankruptcy?**
A: Making a PET during bankruptcy could be challenged by creditors as an attempt to hide assets. The Insolvency Act 1986 allows courts to reverse such gifts if deemed fraudulent, so consult a legal expert first.
---
**20. Q: How do PETs interact with the 14-year rule for IHT?**
A: The 14-year rule applies when you’ve made chargeable lifetime transfers (e.g., to discretionary trusts) before a PET. If you die within seven years of a PET, HMRC looks back 14 years for prior chargeable transfers, which could reduce your nil-rate band and increase IHT on the PET.
---
About the Author
Mr. Maz Zaheer, FCA, AFA, MAAT, MBA, is the CEO and Chief Accountant of My Tax Accountant and Total Tax Accountants—two of the UK’s leading tax advisory firms. With over 14 years of hands-on experience in UK taxation, Maz is a seasoned expert in advising individuals, SMEs, and corporations on complex tax matters. A Fellow Chartered Accountant and a prolific tax writer, he is widely respected for simplifying intricate tax concepts through his popular articles. His professional insights empower UK taxpayers to navigate their financial obligations with clarity and confidence.
Disclaimer:
The information provided in our articles is for general informational purposes only and is not intended as professional advice. While we strive to keep the information up-to-date and correct, My Tax Accountant makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the website or the information, products, services, or related graphics contained in the articles for any purpose. Any reliance you place on such information is therefore strictly at your own risk. The graphs may also not be 100% reliable.
We encourage all readers to consult with a qualified professional before making any decisions based on the information provided. The tax and accounting rules in the UK are subject to change and can vary depending on individual circumstances. Therefore, My Tax Accountant cannot be held liable for any errors, omissions, or inaccuracies published. The firm is not responsible for any losses, injuries, or damages arising from the display or use of this information.
Comments