What is PET (Potentially Exempt Transfer) in simple terms?

D2007

My mum is to "gift" me £90k to add to my savings and a mortgage to buy a home that we will both live in. I understand that the mortgage lender will want a letter stating she is not wanting anything from this gift. But having recently read another post, I read that if she was to do this and then live in the house that was bought from such funds (which she will be), something called "PET (Potentially Exempt Transfer)" would apply.

Would someone be able to explain this in laymen terms as I can't understand from all the legal results I've found when googling it.

The best I can make out from my understanding is that it means the amount won't be excluded from being counted in her inheritance tax, even if she died later than 7 years. Which if this was the only downside of this scenario, wouldn't matter since her "estate" is below £100k and is never likely to get any higher, so would be below any IHT threshold anyway.

(The reason she isn't going to be on the mortgage with me is because her credit history is extremely bad and we don't want it impacting mine by being financially linked with each other)

Mikeyorks

Not my expertise - but I think this actually explains it rather simply? :-

http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm#4

Your understanding (ie not excluded from IHT) is correct. The gift would be a PET (if she lived for 7 years etc) ........ only if she did not retain an interest in it. As she is retaining an interest - it's not so categorised.

Money_Grabber13579

Assuming she will have no interest in the gift after it is made i.e. living rent free in the house, then no IHT will be payable should she die in more than 7 years time. However, if she dies within the 7 year period, it will be included as part of her estate, subject to taper relief depending on the number of years from the gift. 3-4 years = 20% relief, 4-5 = 40%, 5-6 = 60%, 6-7 = 80%.

Niggles

This is not my area of expertise either but my understanding would be the opposite of Money_Grabber. If she lives with you and pays rent etc. as if she was a tenant (and not owner) then she would be considered as having no interest in the property for IHT purposes. However if she lives rent free then she is still gaining benefit from the "gift" (similar to an owner) and so PET would apply.
Also of course your mother should not be registered in the title to the property.

I entered this without reading it carefully enough, ceeforcat is correct and I meant to say "if she lives rent free then it becomes a gift with reservation and for IHT purposes the gift never took place."
Apologies - I must try harder in future.

ceeforcat

However if she lives rent free then she is still gaining benefit from the "gift" (similar to an owner) and so PET would apply.

Can't agree with that -is it not the case that if she continue to live rent free if the 'gifted' property, for IHT purposes it is as if the gift never took place i.e. the gift is not potentially exempt.

Happy to be corrected if I am wrong though.

p00hsticks

It might help to understand it if you think about WHY it's there.

If there was no PET legislation, then someone on their death bed could simply give all their possessions away to whoever they want, and avoid paying any inheritance tax.

So in order to avoid this, the government introduced rules to say that if you give your possessions away and die shortly (up to seven years) afterwards, then it will be broadly treated the same way as if you had left the possessions to someone in your will, and therefore inheritance tax will need to be paid (if appropriate).

dzug1

Money_Grabber13579 wrote: »

Assuming she will have no interest in the gift after it is made i.e. living rent free in the house, then no IHT will be payable should she die in more than 7 years time. However, if she dies within the 7 year period, it will be included as part of her estate, subject to taper relief depending on the number of years from the gift. 3-4 years = 20% relief, 4-5 = 40%, 5-6 = 60%, 6-7 = 80%.

Correct - but not about taper relief. Taper relief only applies if more than the nil rate band is given away in any one year. Not the case here from the sound of it