A Chargeable Transfer is any transfer which incurs
an immediate liability to IHT. If this occurs on death, then the rate of IHT is currently 40%. If however the transfer occurs when the donor
is alive then the rate is half the death rate, or currently 20%. When looking at the value of a gift for IHT
purposes, remember the liability is based upon the loss to the estate.
So for example if I own a pair of antique vases which have a total value of £10,000, each vase individually might only be
valued at £3,000.If I give away only one vase and keep one, the value of the gift for IHT purposes would be
£7,000. This is because by giving one vase away, even though it was only valued at £3,000 it has reduced the value of
my estate by £7,000, as previously the two vases were worth £10,000 and now the single vase I have left is only worth £3,000 so the loss in the value of my
estate is the difference of £7,000
These are transfers that are specifically exempted
from IHT and should not be confused with Allowances (which we will cover
later). Examples of Exempt Transfers
Gifts between Spouses or Civil Partners
Gifts to a Registered Charity
Gifts to a Political Party
Gifts of national heritage property to a suitable
non-profit-making body; i.e. The National Trust
Unlike Allowances, the whole transfer is exempt and
the gift is not limited in value.
Potentially Exempt Transfers
In simple terms, everything that is not a Chargeable
Transfer or an Exempt Transfer is by default a Potentially Exempt Transfer or
PET. This means that there is no tax due
at the time of the gift, but the tax liability is calculated based upon the
rates and allowances at the time of the gift.
If the donor dies within seven years of making the gift, then the “PET
is deemed to have failed” and the tax that was due at the time of the gift now
becomes payable. There is a discount on
any IHT due depending upon the time scale between the date of the gift and the
date of death, this is known as Taper Relief, more on that later.
However, unlike the IHT liability which benefits
from Taper Relief, any Allowances that were utilised at the date of the PET are
lost in full for the entire seven year duration of the PET. After the seventh anniversary of the PET, the
PET falls away and applicable Allowances are reinstated.