What about other lifetime gifts not mentioned above?

If you make a gift in any of the situations described below and it isn't covered by one of the exemptions already described, it is known as a 'potentially exempt transfer' (PET). A PET is only free of inheritance tax if you live for seven years after you make the gift.

Gifts that count as a PET are gifts made to:

  • Another individual
  • A trust for someone who is disabled, and
  • A bereaved minor's trust where, as the beneficiary of an Interest In Possession (IIP) trust (with an immediate entitlement following the death of the person who set up the trust), you decide to give up the right to receive anything from that trust or that right comes to an end for any other reason during your lifetime.

If you make a gift with strings attached (technically known as a 'gift with reservation of benefit'), it will still count as part of your estate, no matter how long you live after making it. For example, if you give your house to your children and carry on living there without paying them a full commercial rent, the value of your house will still be liable for inheritance tax.

In some circumstances a gift with strings attached might give rise to an Income Tax charge on the donor based on the value of the benefit they retain. In this case the donor can choose whether to pay the Income Tax or have the gift treated as a gift with reservation.

Source: Crown Copyright Direct.gov.uk