Inheritance tax (IHT) hit the headlines in all the wrong ways following the 2024 Autumn Budget. If as an IHT planning move one of your parents makes a gift to you to reduce their estate and dies a few years later, who’s liable to pay any IHT?
Lifetime transfers
You’re probably aware that if an individual makes a gift to another there’s no inheritance tax (IHT) to pay at the time. The gift is known as a potentially exempt transfer (PET). The trouble is, if the person who made the gift dies in the following seven years the potential exemption is lost and the gift becomes chargeable to IHT.
Trap. The legislation says that it’s the recipient of the gift who must pay the IHT. What’s more, they are required to notify HMRC (on Form IHT100) within a year following the end of the month in which the person who made the gift died.
Tip. In practice, HMRC will not usually insist on an IHT100 but there are exceptions. If you’ve received a gift of money or other assets from someone who dies within the following seven years, check HMRC’s guidance to see if it will require a Form IHT100 from you.
How much tax?
Where a PET you’ve received becomes chargeable to IHT, it doesn’t automatically mean you’ll have tax to pay. IHT is calculated on transfers made by the deceased in chronological order and the nil rate band (NRB) (the amount of an estate on which IHT is charged at 0%) is always allocated against the earliest amounts chargeable.
Example. In June 2024 Derek gave his son shares worth £200,000. This was the only gift he made in the seven years prior to his death in March 2027. The £200,000 which started as a PET became chargeable when Derek died. The tax is calculated as follows.
| Event | £ |
|---|---|
| Gift | 200,000 |
| IHT annual exemption 2024/25 | (3000) |
| IHT exemption 2023/24 | (3000) |
| Chargeable to IHT | 194,000 |
| Nil rate band for year in which PET became chargeable (2026/27) | 325,000 |
| IHT payable by Derek’s son | Nil |
The good news for Derek’s son is that he has no IHT to pay, the bad news for Derek’s estate is that the former PET has used £194,000 of the NRB, leaving only £131,000 (£325,000 - £194,000) chargeable at 0%. The value of Derek’s estate in excess of this is chargeable at 40%.
Tax payable by recipient
If the PET alone or with earlier PETs made in the seven years before death exceed the IHT NRB, this is payable by the recipient of the PET. For example, if Derek had two other sons and had made gifts of £200,000 to each of them in late 2020 and 2021, it would mean none of the NRB would be available for the gift to Derek in 2024. After deducting the annual exemption he would be liable to tax at 40%.
Tip. If significant PETs are to be made, it’s important that you consider the consequences of their timing. Gifts made at different times can mean that the recipients of later ones might face unexpected IHT bills whereas those receiving them earlier pay nothing. IHT planning through PETs needs to be done openly to ensure that all the parties involved understand the tax consequences.