When it comes to Inheritance Tax planning, few strategies are as effective — or as misunderstood — as the Potentially Exempt Transfer (PET).

For landlords, homeowners, and business owners looking to gift property or other assets to family while minimising future tax bills, PETs can be one of the most powerful inheritance tax tools available.

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🧾 What Is a Potentially Exempt Transfer (PET)?

A Potentially Exempt Transfer is a gift made by an individual to another individual (or a bare trust) which can become completely free of Inheritance Tax — provided the donor survives seven years after making it.

If the donor dies within seven years, the gift becomes a chargeable transfer and may use up part of their nil rate band (£325,000).

In short: Survive seven years — no IHT. Die sooner — it may count back into your estate.

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🕒 The Seven-Year Rule Explained

The seven-year rule is central to how PETs work:

• Survive seven years: The gift is fully exempt from Inheritance Tax.
• Die within seven years: The value is added back to your estate.
• Taper relief reduces the tax gradually if death occurs between 3 and 7 years after the gift.

Years between gift & death	% of IHT payable
0–3 years	100%
3–4 years	80%
4–5 years	60%
5–6 years	40%
6–7 years	20%

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🏠 Example: Gifting a Property to Your Children

Let’s say you own a buy-to-let property worth £300,000, mortgage-free. You decide to gift the property to your two children to help them get on the property ladder.

Here’s what happens:

• You transfer ownership of the property into their names — that’s your Potentially Exempt Transfer.
• If you live for 7 years after the transfer, the entire £300,000 gift is exempt from Inheritance Tax.
• If you die after 5 years, it becomes chargeable, but taper relief reduces the tax payable.

If your estate (including the gift) stays within the nil rate band (£325,000), no IHT may be due anyway.

However, if you had multiple gifts within 7 years, they’re considered in chronological order, using up the nil rate band before any taper relief applies.

💡 Important: Gifting a property can also trigger Capital GainsTax (CGT) if its market value has increased since purchase — even though you’ve received no payment. You’ll be treated as if you sold it at market value, so it’s crucial to seek professional advice before gifting.

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⚠️ Beware of “Gifts with Reservation of Benefit”

If you give away an asset but still benefit from it, HMRC treats it as if you never gifted it at all.

Example:
You gift your home to your children but continue living there rent-free — that’s a Gift with Reservation of Benefit.
To make it effective for IHT:

• You must pay full market rent, or
• Completely give up benefit (move out or stop using the property).

Otherwise, the property remains part of your taxable estate.

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💡 Why PETs Are So Useful for IHT Planning

PETs allow families to transfer wealth tax-efficiently while remaining straightforward and flexible.
They’re especially beneficial for:

• Parents helping children buy homes.
• Landlords passing investment properties to family.
• Individuals gifting cash or shares to reduce their taxable estate.

Combine PETs with annual exemptions (£3,000 per year), small gift exemptions (£250 per person), or regular gifts from income, and you can pass on wealth gradually without any IHT exposure.

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🧮 PETs vs. Chargeable Lifetime Transfers (CLTs)

Feature	PET	CLT
Gift to	Individual / bare trust	Discretionary or interest-in-possession trust
IHT at time of gift	None (potentially exempt)	20% if above nil rate band
Survive 7 years?	Becomes fully exempt	Still chargeable but no extra tax unless donor dies
If donor dies within 7 years	Added back to estate, taper relief may apply	Reassessed at 40%, credit for 20% lifetime tax
Uses nil rate band?	Only on death	Immediately on gift

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🧠 Final Thoughts

Using Potentially Exempt Transfers to gift property or assets can dramatically reduce your Inheritance Tax exposure — but only when planned carefully.
Always document your gifts clearly, keep valuation evidence, and ensure you understand the IHT and CGT implications.

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📞 Need advice on gifting property or IHT planning?
At Taxes Done Right Ltd, we help landlords, families, and small business owners structure gifts and property transfers the smart way — with no surprises from HMRC.

Call 0161 710 1901 | Email Tax@TaxesDoneRight.co.uk | Visit www.taxesdoneright.co.uk