Most gifts made during a person’s life are not subject to tax at the time of the gift. These lifetime transfers are known as ‘potentially exempt transfers’ or ‘PETs’. These gifts or transfers achieve their potential of becoming exempt if the taxpayer survives for more than seven years after making the gift. If the taxpayer dies within 3 years of making the gift, then the Inheritance Tax position is as if the gift was made on death. A tapered relief is available if death occurs between three and seven years after the gift is made.
A transfer of a property where the estate of another individual is increased may still be treated as a gift to an individual provided two conditions are satisfied. These are that the property does not become comprised in the estate of another person (not ‘individual’), but the estate of another individual is increased.
HMRC’s internal Inheritance Tax manual provides the following example to illustrate this point: Christina owes Penelope, a parent, £50,000. Penelope forgives the debt. This is a transfer of value since the value of Penelope’s estate is diminished by the disposition. This transfer can potentially be a PET.
It’s good practice to keep a list of any PETs that you make. It is also important to keep a record of any exemptions that are used as well as details of any regular gifts made out of surplus income.