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How to make a PET (Potentially Exempt Transaction)

Practical Issues
MyNameIsUrl
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How to make a PET (Potentially Exempt Transaction)

#324426

Postby MyNameIsUrl » July 7th, 2020, 7:30 pm

My wife and I are about to give each of our two (adult) children a cash lump sum for use as a house deposit.

Of course there is a likelihood that this transaction may be carefully scrutinised in the future when it comes to assessing our liability for IHT, so I’m considering the best way to effect the transfer to ensure clarity.

I’m thinking if I do the transfer from our current account to each of their current accounts it’s likely that clear bank records will be available to show the event, even many years from now.

Should we transfer from our joint current account or do it from an individual current account? In which case, does it matter which one of us does it?

(I’ll make a note of the details to be kept with our wills so that evidence is available.)

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Re: How to make a PET (Potentially Exempt Transaction)

#324465

Postby Lootman » July 7th, 2020, 11:04 pm

If it is anything like when I did the same thing for my kids, then the mortgage lender will insist on a letter from you certifying that the money transfer to your kids is an outright unconditional gift and not a loan.

I figure that a copy of your written statement in satisfaction of that would provide all the evidence that is needed. Along with a record of the cheques or transfers.

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Re: How to make a PET (Potentially Exempt Transaction)

#324466

Postby supremetwo » July 7th, 2020, 11:07 pm

You first need to consider that 2x£3000 will be exempt provided no other gifts - £3000 for this tax year and the same for the last tax year for each of you.

Then look at the possibility of a gift out of income.

https://www.gov.uk/hmrc-internal-manual ... /ihtm14231

Then consider any balance, which will come under the 7-year rule.

So you may well end up with 3 separate amounts to each child.

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Re: How to make a PET (Potentially Exempt Transaction)

#324489

Postby fca2019 » July 8th, 2020, 6:51 am

My parents transferred a house deposit gift from their joint current account. Then when my father passed only 50% of the gift was included in his chargeable estate. The remainder 50% is included in my mum's estate until 7 years have passed.

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Re: How to make a PET (Potentially Exempt Transaction)

#325271

Postby Eboli » July 10th, 2020, 7:20 pm

The best way would be to write a letter to the donee and enclose the cheque with the letter. Then simply take a copy of both and keep the copies with your will. Your executor will be able to deal with whether the gift is a PET (or partial PET with annual allowance or a particular exemption applying at the date of your death). Incidentally as IHT works backwards from the date of death the rules at that time (and not now) will determine whether it is a PET (or partial PET).

Eb.

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Re: How to make a PET (Potentially Exempt Transaction)

#325273

Postby Lootman » July 10th, 2020, 7:30 pm

Eboli wrote:Incidentally as IHT works backwards from the date of death the rules at that time (and not now) will determine whether it is a PET (or partial PET).

Isn't it a general rule of tax law, and law in general, that changes to that law can never be retrospective?

So for example if Corbyn had been elected last year and immediately abolished PET's, then any pre-existing PET's would continue under the old rules?

That said it is always a risk with any IHT avoidance shelter or strategy that it might be withdrawn. So for instance if (qualifying) AIM shares held for more than 2 years suddenly became subject to IHT then that would be effective immediately. Only those already dead would enjoy that exeption.

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Re: How to make a PET (Potentially Exempt Transaction)

#325280

Postby scrumpyjack » July 10th, 2020, 7:57 pm

Lootman wrote:
Eboli wrote:Incidentally as IHT works backwards from the date of death the rules at that time (and not now) will determine whether it is a PET (or partial PET).

Isn't it a general rule of tax law, and law in general, that changes to that law can never be retrospective?

So for example if Corbyn had been elected last year and immediately abolished PET's, then any pre-existing PET's would continue under the old rules?

That said it is always a risk with any IHT avoidance shelter or strategy that it might be withdrawn. So for instance if (qualifying) AIM shares held for more than 2 years suddenly became subject to IHT then that would be effective immediately. Only those already dead would enjoy that exeption.


It is a convention rather than a rule that tax law is not retrospective, but retrospective changes have been made before. Denis Healey in the 70's made a retrospective increase in tax after the tax year had ended which put the marginal rate of tax for some over 100%!

It would have been perfectly possible for Parliament under Prime Minister Corbyn to change the IHT rules so that previous PETs, for example, only became IHT exempt after 20 years rather than 7. That could be argued even not to be retrospective as the taxable event was the death, not the PET, and the death had not yet occurred.

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Re: How to make a PET (Potentially Exempt Transaction)

#325283

Postby Lootman » July 10th, 2020, 8:03 pm

scrumpyjack wrote:It would have been perfectly possible for Parliament under Prime Minister Corbyn to change the IHT rules so that previous PETs, for example, only became IHT exempt after 20 years rather than 7. That could be argued even not to be retrospective as the taxable event was the death, not the PET, and the death had not yet occurred.

He could have done that for sure. But isn't the principle that underlies the "no retrospectivity" convention that people can only make decisions based on the law as it is at that time? So we should be able to reasonably rely on what we perceive as the situation now and not be penalised for that?

So that for example if there were a 20 year PET rule then I would not perform a PET at all. Rather I would do something else.

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Re: How to make a PET (Potentially Exempt Transaction)

#325286

Postby scrumpyjack » July 10th, 2020, 8:13 pm

Lootman wrote:
scrumpyjack wrote:It would have been perfectly possible for Parliament under Prime Minister Corbyn to change the IHT rules so that previous PETs, for example, only became IHT exempt after 20 years rather than 7. That could be argued even not to be retrospective as the taxable event was the death, not the PET, and the death had not yet occurred.

He could have done that for sure. But isn't the principle that underlies the "no retrospectivity" convention that people can only make decisions based on the law as it is at that time? So we should be able to reasonably rely on what we perceive as the situation now and not be penalised for that?

So that for example if there were a 20 year PET rule then I would not perform a PET at all. Rather I would do something else.


Yes but for some governments the principle of screwing the rich til the pips squeak (as Mr Healey said) would take priority over what is reasonable or fair

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Re: How to make a PET (Potentially Exempt Transaction)

#325294

Postby ursaminortaur » July 10th, 2020, 8:57 pm

scrumpyjack wrote:
Lootman wrote:
scrumpyjack wrote:It would have been perfectly possible for Parliament under Prime Minister Corbyn to change the IHT rules so that previous PETs, for example, only became IHT exempt after 20 years rather than 7. That could be argued even not to be retrospective as the taxable event was the death, not the PET, and the death had not yet occurred.

He could have done that for sure. But isn't the principle that underlies the "no retrospectivity" convention that people can only make decisions based on the law as it is at that time? So we should be able to reasonably rely on what we perceive as the situation now and not be penalised for that?

So that for example if there were a 20 year PET rule then I would not perform a PET at all. Rather I would do something else.


Yes but for some governments the principle of screwing the rich til the pips squeak (as Mr Healey said) would take priority over what is reasonable or fair


Except he never actually said that. What he said in a speech in Lincoln on 18 February 1974 was that he would "squeeze property speculators until the pips squeak". This was in response to allegations at the time that Lord Carrington, the Conservative Secretary of State for Energy, had made £10m profit from selling agricultural land at prices 30 to 60 times as high as it would command as farming land.

The expression itself though wasn't Healeys having been used by Conservative MP Eric Geddes in 1918 in reference to the Germans
"We shall squeeze the German lemon until the pips squeak!"

https://en.wikipedia.org/wiki/Eric_Geddes

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Re: How to make a PET (Potentially Exempt Transaction)

#325296

Postby Lootman » July 10th, 2020, 9:04 pm

ursaminortaur wrote:
scrumpyjack wrote:
Lootman wrote:He could have done that for sure. But isn't the principle that underlies the "no retrospectivity" convention that people can only make decisions based on the law as it is at that time? So we should be able to reasonably rely on what we perceive as the situation now and not be penalised for that?

So that for example if there were a 20 year PET rule then I would not perform a PET at all. Rather I would do something else.

Yes but for some governments the principle of screwing the rich til the pips squeak (as Mr Healey said) would take priority over what is reasonable or fair

Except he never actually said that. What he said in a speech in Lincoln on 18 February 1974 was that he would "squeeze property speculators until the pips squeak". This was in response to allegations at the time that Lord Carrington, the Conservative Secretary of State for Energy, had made £10m profit from selling agricultural land at prices 30 to 60 times as high as it would command as farming land.

The expression itself though wasn't Healeys having been used by Conservative MP Eric Geddes in 1918 in reference to the Germans
"We shall squeeze the German lemon until the pips squeak!"]

But the net effect was the same as if he had. By the time of the next election it will be 50 years since the British voters ever again trusted a confiscatory left-wing government.

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Re: How to make a PET (Potentially Exempt Transaction)

#325297

Postby MyNameIsUrl » July 10th, 2020, 9:04 pm

supremetwo wrote:You first need to consider that 2x£3000 will be exempt provided no other gifts - £3000 for this tax year and the same for the last tax year for each of you.

Then look at the possibility of a gift out of income.

https://www.gov.uk/hmrc-internal-manual ... /ihtm14231

Then consider any balance, which will come under the 7-year rule.

So you may well end up with 3 separate amounts to each child.

Thanks, I've now read up on these three types of gifts and have food for thought for the future. However the crux of my current issue isn't addressed in the manuals, namely that my wife and I (with joint finances) will be making the gifts, and all the guidance seems to relate to individuals. If we make a transfer/cheque from our joint account, would the assumption be made in the event of death that the gift was given 50:50 from each of us? Is there any benefit to us using an account in a single name?

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Re: How to make a PET (Potentially Exempt Transaction)

#325305

Postby ursaminortaur » July 10th, 2020, 9:59 pm

Lootman wrote:
ursaminortaur wrote:
scrumpyjack wrote:Yes but for some governments the principle of screwing the rich til the pips squeak (as Mr Healey said) would take priority over what is reasonable or fair

Except he never actually said that. What he said in a speech in Lincoln on 18 February 1974 was that he would "squeeze property speculators until the pips squeak". This was in response to allegations at the time that Lord Carrington, the Conservative Secretary of State for Energy, had made £10m profit from selling agricultural land at prices 30 to 60 times as high as it would command as farming land.

The expression itself though wasn't Healeys having been used by Conservative MP Eric Geddes in 1918 in reference to the Germans
"We shall squeeze the German lemon until the pips squeak!"]

But the net effect was the same as if he had. By the time of the next election it will be 50 years since the British voters ever again trusted a confiscatory left-wing government.


Actually at the time the misreporting didn't really hurt the Labour party. The speech was made on the 18th February 1974 but Labour still got the most seats at the general election which was held on the 28th February 1974. However Labour didn't have a majority and ruled as a minority government before calling another election in October 1974 at which they got a narrow majority. That together with the later support of the Liberals (in the 1977 Lib-Lab pact) allowed them to continue in power until the 1979 election.

I'll leave it there since this is getting a little off-topic for this thread.

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Re: How to make a PET (Potentially Exempt Transaction)

#325306

Postby PinkDalek » July 10th, 2020, 10:14 pm

MyNameIsUrl wrote:[However the crux of my current issue isn't addressed in the manuals, namely that my wife and I (with joint finances) will be making the gifts, and all the guidance seems to relate to individuals. If we make a transfer/cheque from our joint account, would the assumption be made in the event of death that the gift was given 50:50 from each of us?


I don’t think anyone has bothered to answer your question but HMRC’s own views on joint accounts may be found in their IHT Manual:

The extent of the share (England, Wales and Northern Ireland): Joint money accounts
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm15042

From that one can presumably assume that, if equally funded, gifts from there would be treated as 50/50.

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Re: How to make a PET (Potentially Exempt Transaction)

#325320

Postby gryffron » July 10th, 2020, 11:30 pm

A gift is a gift because the giver says it is. Of course, for most cases where it is important to know (executors of wills and IHT calculations) the giver isn't around any more to say anything. So for those reasons it is important to document the gift. A simple letter is quite adequate. Explicitly state the amount, that it is a gift, date and sign. Give original to the recipient, and keep a copy with your will(s).

Gifts from joint accounts could be deemed to be split as discussed by the previous post. Which is MUCH more complicated for executors to calculate. Saves a lot of arguement to send everything via individual accounts. That and the letter should set the gift(s) in stone.

Gryff

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Re: How to make a PET (Potentially Exempt Transaction)

#328904

Postby Eboli » July 27th, 2020, 9:33 am

Just to add a couple of points of clarification.

IHT is NOT a tax on gifts as such. It's a tax on chargeable transfers of value and they are events by which the estate of the "donor" is diminished; and the tax is based upon the amount of that diminution.

The reason why you 'backward' look from the date of death - and why that itself is not retrospective taxation - is transfers of value made before death, if not exempt (e.g., because they fall with the annual £3K exemption or are made specifically exempt, such as gifts in consideration of marriage, or gifts out of income &c) are only potentially exempt. They are, as it were, only contingently exempt dependent upon satisfying TWO further rules:

a. that they are made 7 years or more before the date of death - a fact that can only be determined when the date of death is established; AND

b. that in the period of 7 years before the date of death or from the date of the transfer until the date of death whichever is the shorter period, the transferor did not reserve any benefit over the property transferred (plus various extensions to the meaning of what constitutes a reservation over any such property to prevent avoidance and too numerous to go into here).

Eb.

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Re: How to make a PET (Potentially Exempt Transaction)

#328908

Postby scrumpyjack » July 27th, 2020, 10:04 am

and just for the record, PET stands for Potentially Exempt Transfer (not Transaction)

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Re: How to make a PET (Potentially Exempt Transaction)

#328957

Postby Lootman » July 27th, 2020, 1:35 pm

Eboli wrote: in the period of 7 years before the date of death or from the date of the transfer until the date of death whichever is the shorter period, the transferor did not reserve any benefit over the property transferred (plus various extensions to the meaning of what constitutes a reservation over any such property to prevent avoidance and too numerous to go into here).

If that is the official definition then so be it. But it doesn't sound right to me since it doesn't allow for a situation where a gift/transfer is made and a benefit is reserved, but then later that benefit ceases. In that case the seven year rule should still apply - it just starts from the date of the cessation of the benefit rather than the date of the transfer. Example:

January 1st, 2000: I sign over my house to my son but continue to live in it.
January 1st, 2010: I cease living in the house and my son moves into it.
January 1st, 2017: The gift/transfer matures into an exempt gift/transfer and no IHT would be due upon my subsequent death.

The definition you provide implies that is not valid. On a literal reading anyway, it reads as saying that if you ever derive a benefit, even for a very short period of time, then it will never be exempt.

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Re: How to make a PET (Potentially Exempt Transaction)

#329001

Postby chas49 » July 27th, 2020, 3:46 pm

Lootman wrote:
Eboli wrote: in the period of 7 years before the date of death or from the date of the transfer until the date of death whichever is the shorter period, the transferor did not reserve any benefit over the property transferred (plus various extensions to the meaning of what constitutes a reservation over any such property to prevent avoidance and too numerous to go into here).

If that is the official definition then so be it. But it doesn't sound right to me since it doesn't allow for a situation where a gift/transfer is made and a benefit is reserved, but then later that benefit ceases. In that case the seven year rule should still apply - it just starts from the date of the cessation of the benefit rather than the date of the transfer. Example:

January 1st, 2000: I sign over my house to my son but continue to live in it.
January 1st, 2010: I cease living in the house and my son moves into it.
January 1st, 2017: The gift/transfer matures into an exempt gift/transfer and no IHT would be due upon my subsequent death.

The definition you provide implies that is not valid. On a literal reading anyway, it reads as saying that if you ever derive a benefit, even for a very short period of time, then it will never be exempt.


I agree that your example would not attract a charge to IHT - because the 7 year period is shorter than the period between the date of transfer and death - so it's the last 7 years only that are relevant - and there was no benefit reserved in that time. I don't see a conflict between Eboli's definition and your example.


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