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A gift, also known as a potentially exempt transfer (PET), is a transfer of value, for example, an outright gift to an individual or a voluntary disposal of property during a person’s lifetime. The value is the loss to that person’s estate for Inheritance Tax (IHT) purposes. For example, a controlling shareholding can be worth more than the value of an individual share.
PETs are ‘potentially’ exempt gifts and will drop out a person’s estate if they survive seven years from the date of the gift (unless it is a Gifts With Reservation of Benefit).
How does a potentially exempt transfer affect my estate?
Where a person fails to survive the seven-year period after the transfer, the potentially exempt transfer will become chargeable to IHT and therefore use up the first part of the person’s Nil Rate Band (NRB), which is £325,000 per person chargeable at 0% to IHT. Any PETs made within seven years of death which exceed the NRB may be liable to IHT at 40%. Who will pay the IHT liability will depend on whether there is a Will in place and the wording in the Will.
What is the Gifts With Reservation of Benefit rule?
A GROB is where the person reserves some of the benefits of the gift that they are making, for example, where a person gifts their home to their child, who is an adult and has their own home but continues to live in the property without paying market rent. In this situation, the gift would be chargeable to IHT and is treated as if it remained in the person’s estate, but in every other sense, the property is legally owned by the child, so if the property is sold at a gain, the child would be liable to pay Capital Gains Tax as the property is not their main residence.
How do Gifts With Reservation of Benefit affect the PET position?
If a Gifts With Reservation of Benefit ends during the person’s lifetime, it will be deemed as a PET from the date that the individual stops benefitting from the gift and starts the seven-year clock ticking.
However, the following are exceptions to the GROB rules:
- If the person making the gift shares the benefit with the recipient. Taking the example above, a parent owns their home and gifts half to a child who lives with them.
- Where a person makes a gift and retains the benefit but pays full market rent for the usage, the transfer will not be considered as a GROB.
- If a person gifts their property and ceases to occupy it to a relative/spouse or civil partner, and if, in the future, they reoccupy due to unforeseen circumstances, the GROB rules will not apply if certain conditions are met.