Find out how to give away money from your estate to reduce your inheritance tax bill, and what is a ‘potentially exempt transfer’

Example one: gift below the nil-rate band

Anne gives away £100,000 in March 2013, and died in April 2018, leaving a £500,000 estate.

Anne doesn’t live seven years after making the gift, so it’s reassessed as part of her estate.

The £100,000 PET is deducted from her £325,000 allowance, meaning there is £225,000 still to be used against her remaining £500,000 estate.

The remaining £275,000 is taxed at 40%, resulting in a £110,000 inheritance tax bill.

Example two: gift above the nil-rate band

Bill gives away £400,000 in March 2013, and then passes away in April 2018, leaving a further £200,000.

When he dies, the PET is reassessed, and his £325,000 personal allowance is used against the £400,000 gift.

Because the gift is in excess of the allowance, and he survived for more than five years after making the gift, the taxable part of this gift incurs a tapered 16% rate, meaning a £12,000 tax bill for the recipient.

The remaining £200,000 estate is taxed at 40%, leaving a further £80,000 inheritance tax bill.

In total, £92,000 is paid in inheritance tax, saving £18,000 compared with the first example.

Example three: gift more than seven years before death

Charlie gifts £400,000 in March 2010, and then passes away in April 2018, leaving a further £200,000.

When he dies, the PET is deemed successful, as it was made more than seven years before he died. The gift is exempt from inheritance tax, and there is no further inheritance tax consequence.

What’s more, the £200,000 remaining estate falls within the £325,000 allowance – so there is no tax to pay there either.

In total, nothing is paid in inheritance tax, saving £110,000 compared with the first example.

Example four: multiple gifts

Danielle makes multiple potentially exempt transfers, giving £200,000 in March 2013 and £200,000 in March 2015. She passes away in April 2018, leaving a final £200,000.

The £325,000 is first offset against the first £200,000 gift, leaving £125,000 to be offset against the second £200,000 gift.

This leaves £75,000 which is taxed at 32%, as she had lived for more than three years after making it. This generates a £24,000 tax bill, for the second recipient.

The remaining £200,000 is taxed at 40%, resulting in another £80,000 tax charge.

In total, IHT runs to £104,000, still saving £6,000 compared with the first example.