Lifetime transfers and liability to IHT

There are special rules concerning the liability to IHT of a transfer made during a lifetime. For example, most gifts made during a person's life are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'. 

These gifts or transfers achieve their potential of becoming exempt from IHT if the taxpayer survives for more than seven years after making the gift. If the taxpayer dies within three years of making the gift, then the IHT position is as if the gift was made on death. A tapered relief is available if death occurs between three and seven years after the gift is made.

IHT can also be chargeable if the person making the gift retains some 'enjoyment' of the gift made. For example, where an elderly person gifts their home to their children (who usually live elsewhere) and continues to live in the house rent-free. In this case the taxman will not accept that a true gift has been made and the 'gift' would remain subject to inheritance tax even if the taxpayer dies more than 7 years after the transfer.

In addition, transfers into most types of discretionary trusts, transfers involving companies, and transfers into most types of interest in possession trusts are immediately chargeable transfers.