UK households are warned a gift must be a full transfer of ownership, and the person who made the gift must give up all control or benefit over the property, for it to be considered a potentially exempt transfer (PET).
HMRC warning for millions of UK households who’ve given gifts to loved ones since 2018
A seven-year-rule error is costing UK households thousands as they fall foul of HMRC inheritance tax rules. UK households are warned a gift must be a full transfer of ownership, and the person who made the gift must give up all control or benefit over the property, for it to be considered a potentially exempt transfer (PET).
This will mean it is not subject to inheritance tax seven years after the gift was made. If there is any reservation of benefit, the gift will not be considered a PET and may still be subject to inheritance tax.
UK Property Accountants said: “You may wonder how to save your children from getting hit with huge inheritance tax (IHT) bills. You may also consider whether it’s better to make lifetime gifts or leave them in your estate.”
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Discussing “t he 7-Year Rule that can Save IHT”, it said: ” Plan to make lifetime gifts that are potentially exempt transfers (i.e., not to the trust) which will not lead to an immediate charge to inheritance tax.
“In this case, the inheritance tax liability only arises if the donor passes away within 7 years of making the gift.” It added: “Tips: There is no inheritance tax liability if the donor survives more than seven years after the transfer of gift.”
Discussing w hy the gift with reservation (GWR) rules are necessary, HMRC states: ” Most lifetime gifts to non-exempt beneficiaries are Potentially Exempt Transfers (PETs) (IHTM04057) and so become chargeable only if the transferor dies within seven years of the transfer. If the transferor survives the transfer by seven years, the PET becomes an exempt transfer.
“This result was considered unsatisfactory on policy grounds if the transferor continued to receive a benefit from the gifted property (IHTM04030) – for example where the transferor gives their residence to their children but continues to live in it for at least seven years until their death.”
In the absence of special provisions to the contrary, in that example the house would not be taxable on the transferor’s death as part of the death estate even though for practical purposes the transferor had continued to treat the property as their own until their death, or as a PET if the transferor survived the gift for seven years.”
“Accordingly special rules were necessary to protect the Inheritance Tax (IHT) death charge. They are designed to stop taxpayers decreasing the value of their IHT estates by making gifts while effectively leaving their basic situation unchanged. A gift with reservation is one made by the deceased, of property subject to a reservation, which was made on or after 18 March 1986 and which was not an exempt transfer,” it states.