Terminology explained
Potentially Exempt Transfers (PETs)
A Potentially Exempt Transfer allows for unlimited value gifts that become exempt from IHT if the donor survives for seven years after the gift. If the donor does not survive this period, the gift reduces the donor's available NRB.
Nil Rate Band (NRB)
The Nil Rate Band is the threshold up to which no IHT is charged on an individual's estate, set at £325,000 for 2024/25. Estates valued up to this amount are taxed at 0% IHT, while the excess is taxed at 40%.
Residence Nil Rate Band (RNRB)
Available since 6 April 2017, the RNRB adds an additional threshold when a primary residence or its sale proceeds are left to direct descendants. It complements the standard NRB but reduces for estates exceeding £2 million and may involve complex calculations for downsized homes or changes in residence. The RNRB as at 2024/25 is £175,000 per person.
Scenario background
Faiz
Faiz is 70 years old.
Faiz has never been married and intends to leave his entire estate to his son.
He owns his house and holds other liquid investments including Business Relief assets.
Whilst Faiz is alive, he gifts £300,000 of this BR assets to his son (triggering the seven year clock for a PET).
Scenario 1
- Two years later Faiz dies and leaves his entire estate to his son.
- Faiz’s son sold the BR assets before Faiz’s death and used the funds from the sale to purchase a car for his own personal use.
Faiz's Inheritance Tax (IHT) position
Cash and other liquid assets
150,000
BR Assets (gifted within two years)
300,000
Nil Rate Band (NRB)
(325,000)
Scenario 2
- Two years later Faiz dies and leaves his entire estate to his son.
- Faiz’s son had retained the BR assets up until Faiz’s death, and the assets remained relevant property for qualifying purposes.
Faiz's Inheritance Tax (IHT) position
Cash and other liquid assets
150,000
BR Assets (gifted within two years)
300,000
Nil Rate Band (NRB)
(325,000)
Takeaway
The two scenarios above show how the additional conditions must be satisfied in relation to lifetime transfers for the transferred BR assets to remain qualifying and therefore something the donee needs to be mindful of.
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This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.
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