PETs…. Not the ones we cuddle at home

Do you like giving cash or presents, perhaps for birthdays, Christmas/other religious holiday, weddings etc? Most people do. But are you aware of the potential impact these gifts could have on your estate when you die, especially where you like to make multiple gifts each year?

A PET is a term lawyers use for Inheritance Tax purposes. An acronym for Potentially Exempt Transfers, which are, in short, sizeable gifts (whether cash or assets) made to an individual other than a spouse or registered Civil Partners during a person’s lifetime. You don’t immediately incur Inheritance Tax when you make certain gifts while you’re alive. And if you continue to live more than 7 years after you’ve made the gift, it becomes fully exempt from Inheritance Tax. During that 7 year period, your gift is known as a PET.

A lifetime PET

Making PETs during your lifetime is a sensible and valid way of mitigating your projected Inheritance Tax liability on your eventual death. However there are things you should consider when making gifts:-

• Do you document the gifts you are making, whether this be on your computer at home or through your Accountant?
• Do you know why it is important to keep a detailed record of the gifts you make?
• Do you know how to log the gifts you make and where to keep this information?
• Are you aware the impact the gifts you make during your lifetime may have on your estate on your death?

Assuming you have made a Will it is important you choose your executors wisely. After reading this article you may wish to consider matters carefully if a relative or friend asks you to be their executor under their Will. The task of an executor, especially with larger estate, can be huge because they have the responsibility of not only ensuring the Will is adhered to but before distributing the estate to the chosen beneficiaries executors must declare a full financial overview to HM Revenue & Customs. All too often executors are not answering a very important question asked by HM Revenue & Customs – did the deceased make any gifts within 7 years of death?

Executors take note

If you are reading this and you are an executor can you honestly say that you have done your due diligence in ascertaining if the deceased of the estate you are administering made any PETs? Perhaps you don’t know where to start. Perhaps if you knew that you are personally liable for the Inheritance Tax it would urge you to explore this further. Ultimately, you don’t want to end up like Glyne Harris, an executor who distributed an estate to a beneficiary on the understanding that the beneficiary would pay the inheritance tax due. That beneficiary then moved to Barbados without paying the tax and the court ruled that the responsibility fell on Mr Harris to pay the tax due. A cautionary tale for those who have agreed to act as personal representative without being clear about their legal obligations.

Executors are legally obliged to disclose certain gifts made by the deceased in the last 7 years of his or her lifetime. If they don’t and gifts are later discovered by HMRC, because they WILL investigate certain estates further, then the liability falls on the executors and not the beneficiaries, as we have seen above.

HMRC are really clamping down on the failure to disclose lifetime gifts. Whether the non-disclosure is accidental or deliberate I’m sure if you knew that the estate is likely to be heavily penalised, in some cases up to 100% of the overall tax due, it might make you cross your Ts and dot your I’s when it comes to answering the question of lifetime gifts.

Whether you like lawyers or not we are legally trained to advise individuals during their lifetime, whether this be for estate planning or to draft a Will or more, where we can discuss the significance of PETs and the impact these can have on your estate.

We are also able to advise and assist executors in the administration of an estate, which will include a detailed discussion of PETs and how this applies to the estate being administered.

If this resonates with you and you wish to discuss this further then you can contact me directly at the Hove office on 01273 722532 or email me – Emily.Wardrope@coolebevisllp.com We do have offices in Worthing and Horsham as well so if either of those are your preferred location please do let me know and I will direct you to a colleague of mine.