Tax & Accounting News

The Effect Of Recession On PETs

18/09/2009

Under the rules surrounding Potentially-Exempt Transfers (PETs), a gift becomes exempt from inheritance tax (IHT) if the person making the gift survives for another seven years from the date of the gift. After three years there is partial exemption from IHT. The value of the gift is frozen at the time of transfer, making this a valuable tool when prices of assets are going up but in a recession, where prices are falling, it may be less useful.

In the case of immediately chargeable transfers and ‘failed’ PETs, i.e. gifts which have not reached the seven-year deadline, IHT may be charged on the reduced value at the time of death, or on an earlier arm’s-length sale, rather than the value at the time of transfer, which mitigates some of the effect of falling prices.

However, this does not alter the transferor’s cumulative total, for the purpose of calculating later charges. It may make no difference if, for example, the entire transfer falls within the nil rate band and could even make matters worse if other reliefs could have been claimed instead – for example with gifts of quoted shares where Capital Gains Tax (CGT) holdover relief would apply and the value of the shares decreases prior to death within seven years, there is no IHT advantage and CGT-free uplift is lost.

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