Exemption from inheritance tax

Inheritance taxInheritance tax is essentially a voluntary tax, in that with proper planning there is no need for your estate to pay any tax on your death.
One of the most useful tools is the potentially exempt transfer, or PET.
Under the PET rules any gift made to an individual is exempt from inheritance tax if you survive seven years from the date of the gift. If you die before seven years have elapsed, the amount charged to tax is calculated on a sliding scale, with a lower amount being taxed the longer you survive after making the gift.
It is also possible to protect against the IHT liability in the interim period by taking out decreasing term assurance, which basically covers the reducing IHT liability over the seven years.
Example:
Gerald makes PETs to his children, Lucy and Lauren, of £250,000 each in 2007.
Provided he survives until 2014, these gifts will drop out of his estate and he will have saved his estate
from paying inheritance tax of up to £200,000 (40% of £500,000) on this money.

 

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