I’d like to seek clarification on some points re inheritance tax (IHT) rules. I understand that potentially exempt transfer (PET) gifts are deemed outside my estate after seven years. But is it seven tax years or calendar years? Using an example, will a gift made on 30 March 2015 become exempt on 30 March 2022 or on 6 April 2021?
The second part of my question relates to the rule that gifts from surplus net income fall outside my estate immediately as long as the gift is part of my regular expenditure and I still have sufficient income to maintain my6 standard of living.
What is included in the word ‘income’? Will net pension (state and employer) and any profit realised by selling some shares within the capital gains tax (CGT) allowance limit be deemed as income in this context?
Finally what should I understand by the word 'regular'? Do I have to continue making the gift year after year until I die? Or can it be done, say, for five consecutive years, and also will the amount have to be same or it can vary? MB
Robert Pullen, partner at Blick Rothenberg, replies:
As context, a PET is a gift made by an individual to another individual, of value. A PET is not subject to IHT immediately but would be chargeable if the person making the gift, the donor, dies within seven years. This is different to a gift or settlement to a person who is not an individual, such as a trust or company, which is immediately taxable.
To answer the specific query, it is seven years from the date of the gift. Therefore, in the example given, the PET will become exempt and fall out of charge from 30 March 2022.
Making a PET can have other tax implications, which the donor will need to be mindful of. For example, if you make a gift of an asset (rather than cash) that has increased in value from the date you acquired it, the gain is deemed to be crystallised on the gift. Some reliefs are available to 'defer' this gain until the new owner disposes of the asset – but this relief is not always available.
For UK real property, you also need to consider whether any stamp duty land tax (SDLT) or equivalent (in Scotland and Wales) applies. This is usually only the case where there is also a debt or mortgage that is transferred.
Finally, there are some outright exemptions from the usual seven-year PET rule – such as the annual allowance of up to £3,000 per person, as well as small gift exemptions and regular gifts out of income.
'Income' is not defined in the Inheritance Tax Act 1984. However, Her Majesty's Revenue and Customs (HMRC) generally accepts it to be current-year income, net of income tax, and calculated as per normal accountancy rules (which confusingly may not be the same as income under the income tax rules). Accumulated income from previous years will be treated as acquiring a capital nature after a certain point. While there are no set rules as to when this would be, HMRC guidance suggests that retained income should be treated as capital after two years (unless retained with a specific purpose in mind).
Net pension from the current tax year will count as income. Profit realised by selling shares, whether within the annual CGT exemption or not, will not count as income. It is important to note that there are other detailed conditions for this relief to be available, such as establishing a pattern of regular giving. It is also sensible to record or evidence the gifts.
What counts as 'regular' will depend on your circumstances as the donor and what is normal for you – HMRC guidance specifically says 'normal' is not an average to be applied uniformly to everyone. Therefore, all relevant factors will need to be taken into account to assess whether there has been a 'regular' pattern of making gifts.
Similarly, there is no set minimum period that the gifts need to be made for and no requirement for the gift to be made every month, quarter, year etc, however HMRC indicates in its guidance a period of at least three to four years would be reasonable as a minimum. While that is the case, if the intention from the outset is to make gifts for say five years only, it is possible HMRC could take the view the gifts will not qualify as 'normal expenditure' since it is for a pre-determined period. On the other hand, if the intention from the outset is to make regular gifts and evidence is available to support this (eg, a direct debit has been set up) but then the donor’s circumstances change, or the donor dies after only one gift has been made, it could still potentially be argued that the gift is 'regular'.
While the gifts do not have to be the exact same amount each time, they would generally be expected to be comparable in size. If one gift is a lot larger than others, HMRC could argue it is a one-off capital gift.
It should be noted that although this relief is available to remove gifts from the PET seven-year rules, the asset generating the excess income will remain in your estate, including any growth in value. It could therefore be worthwhile exploring other options, including making a gift of part (or all) of the asset directly.
