Pesky PETs and Gruesome GROBS – are they cute and fuzzy or do they bite?
You don’t need to wait until your death to gift assets to your loved ones. In fact, gifting assets during your lifetime can be a really useful way of reducing your potential Inheritance Tax (IHT) bill whilst also providing financial support to those you love.
Whilst you should think carefully about who you want to leave your estate to after you die, this blog is not intended to stress the importance of making a Will – we all know we should have one!
It is, however, intended to draw your attention to PETs and GROBs and to consider if these are something you may want to take advantage of or if you may be in danger of being bitten!
What is a PET?
To some, a PET is a fluffy creature that likes to chase mice or play fetch. To Private Client solicitors PETs can be something far less adorable, but nonetheless appealing.
A PET is a Potentially Exempt Transfer. They are essentially where one person transfers (or gifts) their assets to another person (or a trust) during their lifetime and the gift might be exempt from IHT.
Because of this, PETs can be a handy way of disposing of assets to reduce someone’s IHT bill. But beware – they can bite!
If the person gifting the asset doesn’t survive for 7 years from the date of the gift then the PET fails and the value of the gift is brought back into the estate when calculating your IHT bill. This means that, to be fully IHT exempt, the person gifting the asset must live for 7 years following the date of the gift. If the person gifting the asset dies within the 7 year period, there is a chance that tapering relief can be applied for, which can provide a degree of help. However, you should think carefully about your circumstances and whether ‘now’ is the right time to start gifting.
Naturally, it is best not to leave this kind of planning until it is too late. Equally, you don’t want to give too much away as you will still need to live comfortably after the gift. Getting some advice is always a good idea to ensure that you consider all the factors before you start the process in earnest.
Something else you should know!
There can be consequences if the value of the PET is above the Nil Rate Band (NRB) allowance (currently £325,000). Gifts valued above £325,000 can attract an immediate IHT liability or reduce your NRB allowance (as can lower value PETs that fail). If you are thinking of gifting assets valued at £325,000 or more, you should seek specialist advice.
PETs don’t apply to transfers between spouses/Civil Partners or transfers to charities – these are always exempt of IHT and they won’t reduce a person’s NRB allowance.
Some more handy information
Each person has an annual tax-free gift allowance of £3,000. This means that each tax year you can make gifts of up to £3,000 without having to survive for 7 years. If a previous year’s full tax allowance has not been used it can be rolled over to the next year allowing for up to £6,000 to be gifted.
Other allowances can be used, such as small gifts of up to £250 per person per tax year, gifts for birthdays and Christmas, or expenditure out of excess income. Gifts for weddings and Civil Partnerships can also be tax free but the amounts vary on who you are gifting to.
In order to maximise your annual allowances you should seek specialist advice.
Beware of GROBs
Whilst a PET can be advantageous you want to avoid a GROB.
GROB stands for Gift with Reservation of Benefit and occurs when someone gifts an asset to another but continues to benefit from the asset they gifted. For example, if you gift your house to your child but continue to live in it rent free.
Because of the continuing benefit, the tax man will bring the value of this asset back into your estate when you die. The value of the asset is assessed as at the date of your death, not the value of when it was gifted. It also doesn’t matter how long ago you gifted the asset; it will always be brought back into your estate and because of the continuing benefit it won’t be considered a PET so the 7 year clock won’t apply. This can result in your estate receiving a hefty IHT bill which you might not have expected!
Be wary and if in doubt seek advice
If you are considering gifting assets be mindful of:
- When you make the gift
- Who you make the gift to (your spouse/Civil Partner or a charity will always be exempt)
- The value of the gift (can you use your tax free gifts allowance of £3,000? Is it going to be £325,000 or more?)
- Is it actually a gift – or are you still going to be benefitting from the asset?
- Can you afford it or will the gift have a detrimental effect on your quality of life?
If you want to discuss anything in this blog in more detail please contact our Private Client department.