Using a PET transfer to cover IHT

Rigormo2

What are the pros and cons of gifting sufficient money now as a lump sum by a Potentially Exempt Transfer (PET) to my daughter to cover the anticipated IHT that she will have to bear on our estate some time in the future? This would appear to avoid the premium costs of any alternative insurance schemes to acheive the same aim. Over 7 years it willl also reduce our estate value and increase the value of the net gift after covering IHT.

Keep_pedalling

Provided this is money you can afford to give away there are no cons to be considered. If you are reasonably young and in good health you should also consider taking a out term insurance to cover the risk of kicking the bucket before the 7 years is up.  The insurance just need to cover 40% of the gift and should be quite cheap to take out.

Rigormo2

Not reasonably young or in paticularly good health I'm afraid so insurance would be expensive. My objective is to gift the equivalent of the IHT due for my whole estate including the value of the PET. This would use up the whole PET for the first 3 years after death and then in subsequent years there would be an increasing amount of spare gift after allowance for IHT for my daughter to enjoy for herself. I presume that any interest that she accrues from investing the gift would be outside my estate and therefore be added to my daughter's income. Am I still thinking straight?

Keep_pedalling

Rigormo2 said:

Not reasonably young or in paticularly good health I'm afraid so insurance would be expensive. My objective is to gift the equivalent of the IHT due for my whole estate including the value of the PET. This would use up the whole PET for the first 3 years after death and then in subsequent years there would be an increasing amount of spare gift after allowance for IHT for my daughter to enjoy for herself. I presume that any interest that she accrues from investing the gift would be outside my estate and therefore be added to my daughter's income. Am I still thinking straight?

I’ll deal with you last question first as that is straight forward. Yes, once gifted whatever tax arises from her investing the money is entirely down to her.

I am really confused about what you are trying to say about PETs, to avoid your estate paying IHT you need to gift more than the amount of IHT due you need to gift the whole amount that takes you over you NRBs and you have to survive for 7 years after the gift as in the following example. 

Estate value = £750k including house worth £250k
your NRB = £325k
Your RNRB = £175k

Assuming there is no transferable NRB from a deceased spouse this leaves £250k potentially subject to IHT which would reduce your daughter’s inheritance by £100k, so you need to gift her £250K now and keep breathing for 7 years in order to avoid that. 

 

Rigormo2

Hi Keep-pedalling,

Thanks for responding.

Not trying to avoid IHT, just ensuring that my daughter has sufficient funds in hand to cover the IHT assuming that she doesn't dig too deeply into the PET after the first 3 yrs.

Say for example:

Estate worth £2m including house.

NRB + RNRB combined with spouse =£1m

IHT on £1m = £400K

PET gift to daughter of £400K to cover her IHT bill.

Net PET after paying IHT in years 1) zero, 2) zero, 3) zero, 4) 32K , 5) 64K, 6) 96K, 7) 128K,

Then after 7 years, there would still be 240K IHT to pay on the remaining estate, so net PET remains at 160K.

Does this clarify my objective? Back to the original questions: is my analysis of the rules correct and  what are the pros and cons of this proposal?

Mickey666

May I ask about your family situation, eg spouse and other children?

I ask because it sounds as if you're thinking ahead and that your will leaves everything to your daughter (fair enough).  Your estate will incur IHT but if the above assumptions are correct then I don't really understand why you're concerned about your daughter's ability to pay the IHT bill because it would normally be paid from the estate proceeds anyway.  Or perhaps the plan is for her to keep the house in which case the estate may not have enough liquid funds to pay the IHT (although I guess it must have if you can afford to gift the money now).

Gifting away any spare money seems like a generally good thing to do, in order to reduce your IHT liability, but I'm not really understanding why the eventual payment of any IHT is of concern.  Does it really matter whether it is paid by your estate or your daughter?

getmore4less

Rigormo2 said:

Hi Keep-pedalling,

Thanks for responding.

Not trying to avoid IHT, just ensuring that my daughter has sufficient funds in hand to cover the IHT assuming that she doesn't dig too deeply into the PET after the first 3 yrs.

Say for example:

Estate worth £2m including house.

NRB + RNRB combined with spouse =£1m

IHT on £1m = £400K

PET gift to daughter of £400K to cover her IHT bill.

Net PET after paying IHT in years 1) zero, 2) zero, 3) zero, 4) 32K , 5) 64K, 6) 96K, 7) 128K,

Then after 7 years, there would still be 240K IHT to pay on the remaining estate, so net PET remains at 160K.

Does this clarify my objective? Back to the original questions: is my analysis of the rules correct and  what are the pros and cons of this proposal?

taper relief  only available on £75k (possibly less with the increased NRB) the max taper relief is £30k

Keep_pedalling

The money for IHT will come out of the estate not from what will then be her assets. What you are suggesting makes no sense, if your estate has sufficient liquid assets to meet the IHT liability without the need to sell the house then you don’t need to transfer the money to her now to cover IHT. No point in her keeping that gift back as your estate will still have plenty of assets to pay the IHT bill.

In your situation I would make the gift, but for totally different reasons. A. You may well live 7 years so the PET would be successful, B. You would actually get to see your daughter enjoy The  gift, something you can’t to when you are dead. 

Rigormo2

To GetMoreforLess,

I cann't find any reference to a 75k limit on taper relief for PETs. Can you stear me to an authoritative reference please.

Rigormo2

To KeepPedalling,

I thought that IHT had to be settled before an estate could be passed on, hence the desire to ensure my daughter has sufficient readies at the time of our decease to cover the IHT.

Secondly, if we gift the PET, then the IHT willl reduce over time (up to a max reduction after 7 years). Got to be a good thing from my daughter's point of view.

Jeremy535897

It is the executors' job to sort out assets and liabilities and pay inheritance tax due. Where an estate is illiquid the executors can borrow. Inheritance tax can be paid in instalments (interest chargeable) on property. There is no need to make a gift in advance unless you want to because you believe it is a good idea. You have no guarantee that your daughter will not spend the money, or have it stolen from her, or predecease you.

Taper relief is explained here: https://www.gov.uk/inheritance-tax/gifts

The reference to £75,000 is that, as you will see from the link above, the first £325,000 (at least) of the proposed £400,000 gift is covered by the nil rate band, leaving only £75,000 to be tapered.