When planning how to distribute your wealth and avoid Inheritance Tax there’s a term that might sound a bit puzzling at first: Potentially Exempt Transfer, or PET for short.  

Don’t let the name intimidate you – it’s not as complicated as you might think. Think of it as a way to pass on gifts and assets without leaving a hefty tax bill for your loved ones. 

Defining a Potentially Exempt Transfer 

Imagine you have a treasure chest full of valuables – gold coins, sparkling gems, and cherished heirlooms. Now, imagine you want to share some of these treasures with your family and friends while you’re still around. A Potentially Exempt Transfer (PET) is like placing some of these treasures into a special gift box that comes with a magic tax shield. 

In more formal terms, a PET is a gift or transfer of assets (like money, property, or investments) that you give to someone, usually a family member or friend, without immediately triggering an Inheritance Tax bill. It’s called “potentially exempt” because if you survive for a certain period after making the gift, the tax magic happens – the gift becomes completely exempt from Inheritance Tax. 

The Potentially Exempt Transfer Survival Period 

For a Potentially Exempt Transfer to transform into a fully exempt one, you need to hold on and keep breathing. If you manage to live for seven years after making the gift, then presto! The tax disappears, and the gift becomes free from the clutches of Inheritance Tax.  

However, if you happen to pass away within that seven-year period, the gift isn’t as powerful.  

The gift is still part of your estate, and it might be subject to Inheritance Tax – but here’s the neat part: the longer you survive after making the gift, the less tax will be due.  

Certain smaller gifts are not classed as a Potentially Exempt Transfer and are actually free from Inheritance Tax straight away: 

Gift Allowance – Each year, you can gift a certain amount of money or assets without any tax implications. This is called the Annual Gift Allowance and is currently £3,000 per year.  

Small Gifts – Alongside the annual gift allowance, you can also give small gifts of up to £250 to as many people as you like – these gifts are truly exempt from Inheritance Tax and don’t require any waiting period. 

Wedding Bells – If someone close to you is getting married, you can bestow a generous gift that will be completely exempt from Inheritance Tax, whether or not you survive for seven years. 

When it comes to estate planning, the Potentially Exempt Transfer is a very simple way to possibly avoid Inheritance Tax. It can save a lot of time and money not having to deal with solicitors.   

Remember, it’s all about timing – survive for seven years, and your gifts become tax-free wonders. 

If you are not sure what to do with your personal and workplace pensions at retirement then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy retirements over the years. This could be you too.  


Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.