Passing wealth to your loved ones during your lifetime could allow you to witness the difference it can make.
Indeed, a large gift could help a child or grandchild purchase their first home, complete higher education, or achieve financial security at the start of their adult lives.
Moreover, you could mitigate a potential Inheritance Tax (IHT) bill for your beneficiaries after you’re gone.
From 6 April 2027, most unused pension funds and death benefits could form part of your estate for IHT purposes.
Read more: How to deal with pension and Inheritance Tax changes announced in the Budget
As a result, you may find that a greater portion of your wealth is subject to tax.
You may already know about the £3,000 annual gifting exemption and the smaller amounts available for weddings and civil partnerships.
However, you may have overlooked “potentially exempt transfers” (PETs). These may allow you to give away a larger amount without incurring an IHT charge, provided you meet several important rules.
Continue reading to discover how PETs work and whether they would support your estate planning efforts.
The nil-rate bands determine how much wealth you can pass without incurring Inheritance Tax
First, it’s important to understand how much of your wealth could be subject to IHT before considering PETs.
Your beneficiaries may have to pay tax if the value of your estate exceeds the available “nil-rate bands”. These essentially dictate how much wealth you can pass on tax-efficiently. As of 2026/27, these are:
- The standard £325,000 nil-rate band
- The residence nil-rate band of up to £175,000, provided you leave a qualifying home to a direct descendant, such as a child or grandchild.
Combined, these allowances could enable you to pass on up to £500,000 without IHT. Better yet, spouses and civil partners can usually pass any unused allowances to the surviving partner, resulting in a combined IHT-free threshold of up to £1 million.
Anything above your available allowances is typically taxed at 40%.
Of course, the amount available will depend on your personal circumstances. For example, the residence nil-rate band is gradually tapered if your estate is worth more than £2 million.
Smaller gifting exemptions can reduce the value of your estate immediately
Gifting can help bring an estate’s value closer to the aforementioned thresholds.
For instance, the annual exemption allows you to give away £3,000 each tax year without the gift forming part of your estate. You can typically carry forward this exemption for one year if you don’t use it, potentially allowing you to give £6,000 without incurring tax.
You can also make gifts for weddings or civil partnerships of up to:
- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to another person.
What’s more, the small gifts exemption allows you to give up to £250 to any number of people, provided you have not used another exemption for the same recipient during that tax year.
A potentially exempt transfer could fall outside your estate after seven years
While these exemptions can be a practical way to reduce the value of your estate, they may not be sufficient on their own if you wish to gift a significant amount of wealth.
This is where PETs could be beneficial. A PET is usually an outright gift made from one person to another, and could include:
- Cash
- Investments
- Property
- Other valuable possessions
There is no set maximum amount you can transfer with PETs, as the final tax treatment will depend on how long you survive after making the gift.
If you live for seven years, the gift would typically fall outside your estate for IHT purposes.
However, if you pass away within seven years, the rate of IHT due would typically be measured on a sliding scale known as “taper relief”. The rates are:
- 40% if fewer than three years have passed
- 32% after three to four years
- 24% after four to five years
- 16% after five to six years
- 8% after six to seven years
- 0% once seven years have passed.
It is worth noting that taper relief applies to the tax due, not the value of the transfer. Also, it will usually only be relevant where the total gifts exceed the available nil-rate band.
As a result, the tax treatment of PETs can be less straightforward than simply waiting for seven years to pass.
It’s worth speaking to a financial planner before making a potentially exempt transfer
As you can see, PETs often require careful consideration. While they could allow you to remove a significant amount of wealth from your estate, the rules around rates can become complex.
Moreover, if you give away too much, you could inadvertently affect your own long-term financial security.
At Verso, we can help you understand whether PETs could benefit your unique circumstances and outline other ways you might pass wealth to your loved ones tax-efficiently.
We could also use sophisticated cashflow modelling software to forecast how making a significant gift might affect your financial position over time.
This could ensure you can afford to support the people you care about without inadvertently compromising your own standard of living.
To learn more about how we can help you gift your wealth tax-efficiently, please use our search function to find your nearest Verso office. Or, for Verso Investment Management enquiries, please contact us at info@versoim.com or call 020 7380 3300.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate estate planning, cashflow planning, or tax planning.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.