Understanding Potentially Exempt Transfers (PETs) and Inheritance Tax-Free Gifts

Understanding Potentially Exempt Transfers (PETs) and Inheritance Tax-Free Gifts

How to pass on wealth while reducing your estate's tax liability


When you're thinking about giving gifts to loved ones during your lifetime, it’s important to understand how those gifts are treated for Inheritance Tax (IHT) purposes. Some gifts are immediately tax-free, while others — known as Potentially Exempt Transfers (PETs) — depend on how long you live after making them.

This guide explains the difference and how to make the most of your tax-free allowances.

What Gifts Are Automatically Exempt from Inheritance Tax?

These gifts are immediately outside of your estate and won’t attract Inheritance Tax, regardless of how long you live:

1. Gifts to Your Spouse or Civil Partner

Unlimited tax-free gifts, as long as you’re both UK-domiciled.

2. Your Annual Exemption – £3,000 per Tax Year

You can give away up to £3,000 each year to anyone without it affecting your estate’s IHT position. If unused, you can carry forward the exemption one year — potentially giving away £6,000 tax-free.

3. Small Gifts – Up to £250 Per Person

You can give up to £250 per person each tax year — to as many individuals as you like — as long as they haven't already received part of your £3,000 exemption.

4. Wedding or Civil Partnership Gifts

• £5,000 from a parent
• £2,500 from a grandparent
• £1,000 from others
These must be given before the wedding, and the marriage must go ahead.

5. Regular Gifts from Surplus Income

If you have income left after covering living expenses, you can make regular, habitual gifts — such as paying for a grandchild’s school fees — without IHT implications. These must not reduce your standard of living and should be well-documented.

6. Gifts to Charities

Gifts to UK-registered charities are fully exempt, whether made during your life or in your Will.

7. Family Support Payments

Reasonable gifts to help with living costs — such as maintenance for a former spouse or support for a dependent child or elderly relative — are also exempt.

What Is a Potentially Exempt Transfer (PET)?

A Potentially Exempt Transfer is a larger gift — typically cash, property, or valuables — made to an individual. It’s potentially exempt because it only becomes fully IHT-free if you survive for 7 years after giving it.

The 7-Year Rule

  • Survive 7 years? The gift is fully exempt from IHT.
  • Die within 7 years? The value of the gift is added back into your estate and may reduce your nil rate band (currently £325,000).

Taper Relief: Tax Reduction After 3 Years

If you die between 3 and 7 years after making the gift, taper relief can reduce the amount of tax due:

Time Between Gift and Death Tax Rate (if over nil rate band)

0 to 3 years - 40%
3 to 4 years - 32%
4 to 5 years - 24%
5 to 6 years - 16%
6 to 7 years - 8%
7+ years      -  0% (fully exempt)

Note: Taper relief only applies if the gift, when combined with your estate, exceeds the nil rate band.

Example

In 2020, Alan gave his daughter £100,000 to help buy a house. He had already used his £3,000 annual gift exemption. Alan dies in 2026 — six years after the gift. The gift hasn’t fully cleared the 7-year window, but thanks to taper relief, the IHT rate is reduced from 40% to 8%.

Examples of PETs

  • A £50,000 cash gift to help your child buy a home
  • Transferring ownership of a second property to a relative
  • Gifting valuable jewellery or antiques to grandchildren

Keep Clear Records

To ensure gifts are accounted for correctly and don’t cause confusion later, always record:
  • The date and recipient of each gift
  • The type and value of the asset (cash, property, etc.)
  • Any allowances or exemptions used
This will help your executors and may prevent unnecessary tax being paid.

Final Thoughts

Plan Wisely 

Making tax-efficient gifts is a great way to share your wealth during your lifetime and reduce your estate’s eventual tax bill. But the rules can be complex — especially if your estate is near or over the Inheritance Tax threshold.

If you're unsure, it's wise to speak to an expert and make sure your generosity doesn’t come with hidden costs.

Need help planning your legacy or understanding your tax-free allowances? Get in touch today. 
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