I have just received an inheritance from my late father’s estate, which is exempt from inheritance tax (IHT). I wish to share it mostly among my seven children, giving them about £12,000 each. However, I’m reluctant to do this if it means they would have to pay tax.
Is there any legal way that this can be avoided? I have been reading about the ‘potentially exempt transfer’ (PET) but I’m not sure what that means or if it applies.
If the value of your estate – including these gifts – are beneath the nil-rate band, there is no tax to pay. At present, an individual can pass on £325,000, a couple double that amount and slightly more when passing on a family home to children.
When the value of your estate is above the nil-rate band, you don’t immediately incur IHT when you make certain gifts while you’re alive. If you continue to live more than seven years after you’ve made the gift, it becomes fully exempt from IHT.
During that seven-year period, your gift is known as a ‘potentially exempt transfer’ or PET. If you do not survive the gift by seven years, IHT is due. How much tax is due depends on when the money was given, the value of your previous gifts and the value of your estate. You effectively pay up to 40% of the value of the gift on a sliding scale.
Provided you survive seven years after the date of the gifts to your seven children, then no IHT is due. This method is simple to execute, but you run the risk of not surviving seven years and some tax being payable.
There may be scope to rewrite the will through a deed of variation. This would mean that your children receive their £12,000 as if donated directly from your father to them. Because there is no tax to pay on the transfer from your father to you, then the transfer from your father to them would also be tax free. This has the advantage of avoiding the risk of a PET crystallising on your death.
The will must be rewritten within two years of the date of death of your father, all beneficiaries must agree, and it must show compliance with section 142 Inheritance Tax Act 1984.
This route can be complex and result in lawyer fees, particularly if there are other beneficiaries who don’t agree to the rewriting of the will.