What are “potentially exempt transfers” and how could they help you mitigate Inheritance Tax?

In fact, reports from FTAdviser show that the amount of IHT paid on gifts has risen significantly over the last decade, reaching £256 million in 2020/21 – an increase of more than 150% since 2011.

This suggests that without careful consideration of the rules, it can be easy to inadvertently increase your IHT liability. 

One option that may be worth considering as part of your wider estate plan is a “potentially exempt transfer” (PET). 

Used appropriately, PETs may allow you to pass on substantial wealth in a tax-efficient way. However, they come with strict conditions that often require careful planning. 

With that in mind, continue reading to discover how PETs work and how they could form part of your estate plan.

The nil-rate bands determine how much you can pass on tax-efficiently

Before looking at PETs in detail, it helps to understand the basics of IHT. 

When you pass away, your estate – which includes property, savings, and investments – may be subject to IHT if its value goes above certain thresholds, known as the “nil-rate bands”.

As of 2025/26, these are: 

• £325,000, known as the “standard nil-rate band”
• Up to £175,000 from the “residence nil-rate band”, provided you leave your main home to a child or grandchild. 

These allowances are currently frozen until at least April 2031. 

Together, this means you could potentially pass on up to £500,000 without incurring IHT. If you’re married or in a civil partnership, you can usually pass on any unused allowance to your partner, too, meaning a couple could leave up to £1 million tax-efficiently. 

Anything above these amounts is normally taxed at 40%, which is why planning ahead can make such a difference.

You can use smaller gifting allowances each year before making larger gifts

One of the more straightforward ways to reduce the value of your estate during your lifetime is to use the various gifting exemptions already available. 

Each tax year, you can give away up to £3,000 under the annual gifting exemption. If you didn’t use last year’s allowance, you may be able to carry it forward for one year. 

You can also give tax-free wedding or civil partnership gifts of:

• £5,000 for a child
• £2,500 for a grandchild or great-grandchild
• £1,000 for anyone else.

On top of this, the small gifts allowance lets you give £250 per person per year, as long as they haven’t received another exempt gift from you under another allowance in the same year. 

Another useful option is making regular gifts from surplus income. These gifts can fall outside of your estate immediately, provided they: 

• Come from your income, not savings
• Are made regularly
• Don’t affect your standard of living. 

While these allowances can be incredibly helpful, they might not go far enough if you’re thinking about passing on larger amounts. This is especially the case given that your pension wealth – which could be one of your largest assets – could form part of your estate from April 2027.

This is where PETs may be worth considering as part of your wider estate plan.

Potentially exempt transfers allow you to give larger sums under the seven-year rule

A PET could enable you to give any amount of money to another person without incurring IHT, and there’s no upper limit. 

The main condition is that you need to survive for seven years after making the gift. If you do, the gift usually won’t be counted as part of your estate at all. 

However, if you pass away within those seven years, the gift may still be considered when IHT is calculated. 

The amount of tax your loved ones need to pay will be measured on a sliding scale known as “taper relief”.

The following table shows the levels of tax your beneficiaries could pay depending on your lifespan after making a significant gift:

Due to this timeline, making large gifts early may improve the likelihood of them fallout outside of your estate for IHT purposes. 

It’s also important to remember that if you do pass away within seven years, PETs are usually taken into account before your nil-rate band is applied to the rest of your estate. 

As such, it may be helpful to use other exemptions before making a PET that you intend to benefit from taper relief.

It might be helpful to seek professional advice before making use of potentially exempt transfers

Even though PETs may help you manage the value of your estate, they are a significant decision. 

Once you’ve made a gift, it no longer belongs to you. If you continue to benefit from it in any way, it may still be counted as part of your estate under the “gift with reservation of benefit” rules. 

It’s also important to consider your future needs. With people living longer than ever, retirement can last decades. 

Giving away too much too soon could leave you with a shortfall later in life, unable to fund the lifestyle you desire. 

Read more: How financial planning can significantly boost your wellbeing in retirement

This is where financial planning from Hansford Bell can help. We can:

• Discuss your overall estate planning goals and whether PETs align with your circumstances
• Explain how different tools, such as trusts or whole-of-life cover, might fit into your strategy. 

We can also use cashflow modelling software to show how gifting might affect your finances over time, so you can feel confident you aren’t putting your own security at risk. 

If you’d like to discuss your estate planning options and the ways to pass on your wealth effectively, we’d be happy to help.

Please call us at 01822 617 960, email info@hansfordbell.co.uk, or fill in our online contact form, and we’ll be in touch.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

The Financial Conduct Authority does not regulate estate planning, cashflow planning, or tax planning.