As such, making simple outright cash gifts to family members and surviving them by seven years is typically the most straightforward way of reducing one’s IHT liability. However, various anti-avoidance rules can cause traps for the unwary.
Most importantly, it is imperative that the donor does not continue to benefit from assets given away.
If a benefit is retained, the ‘gift with reservation of benefit’ (GROB) rules provide that the full value of the assets will be treated as remaining in the IHT estate of the transferor notwithstanding the gift.
Only if the donor subsequently ceases to retain a benefit during his/her lifetime would the seven-year clock commence for the gift to fall outside the taxable estate.
The significance of PETs is that there is no limit on the amount an individual can give away.
This is enormously valuable, and PETs are almost always a part of every effective estate planning strategy.
PETs do come with risks, though. The most immediate obvious risk is that the donor might die within the seven-year period, thus triggering IHT – though life insurance policies are available to mitigate that potential exposure.
Other risks also arise. First, the donor must not give away too much, in case he/she finds later in life that they have kept too little for themselves.
Secondly, there are no controls on how outright gifts are used by the recipient, and solicitors regrettably see the consequences of young people being given too much too soon all too often.
Thirdly, assets given outright are available to the recipient’s spouse on a divorce, though that risk can be mitigated by the use of a nuptial agreement – a so-called pre-nup or post-nup.
While PETs are invaluable, they by no means exhaust the arsenal of IHT planning opportunities, and a good strategy will seek to use many or most of them to chip away at IHT liabilities insofar as appropriate.
Using a trust
Historically, trusts were commonly used to give away the benefit of assets while still retaining control over their use by acting as a trustee, and trusts are still the most flexible and appropriate structure in countless cases.
However, changes to the taxation of trusts in 2006 make their use less common now. They can be used to give away an amount up to the NRB – so £650,000 for a married couple – without an up-front charge to tax, and as the NRB refreshes every seven years, that amount can be given to a trust every seven years.
