Giving it all away: PETs, GWRs, and POAT

In this article, PETs refer to potentially exempt transfers for inheritance tax (IHT) purposes; GWRs refer to gifts with reservation of benefit; and POAT to pre-owned assets ta

Potentially exempt transfers

PETs are typically lifetime transfers made by individuals to other individuals. An attraction of PETs is that no immediate IHT charge arises at the date the gift is made. Such a liability only arises
if the donor (i.e., the individual making the gift) dies within seven years of making it (subject to, for example, any taper relief or the nil rate band).

Other things being equal, PETs may be an effective way of reducing the size of an individual’s estate over time, such that on death any IHT charge is mitigated. This is likely to be particularly valuable where the individual is healthy and almost certainly will survive the requisite seven-year period.

Warning: All is not what it may seem!

However, gifting in the above manner may not quite work out as planned.

This is due to provisions in the IHT legislation (contained in IHTA 1984, as amended) which may mean the ‘gift’ is not a gift at all. Those provisions concern GWRs.

Gifts with reservation of benefit

The definition of a gift is where one individual (X) transfers the beneficial interest in an asset to (say) another individual (Y). X is the donor and Y, the donee. For IHT purposes, X will have made a PET and, by doing so, has reduced the size of their estate without any IHT charge arising (assuming satisfaction of the seven-year survival period).

But what if the gift is (say) a valuable antique painting but having made the gift, X keeps it in the study in their own home. In such circumstances, it is clear that X continues to have possession of the painting and continues to enjoy it despite having gifted it to Y. The consequence is that the ‘gift’ is treated as a GWR.

Thus, for IHT purposes, the painting continues to be treated as forming part of X’s estate; the gift for IHT purposes on X’s part is thus ineffective.

Example: ‘Caught’ by the GWR rules

Jack gives his son a set of three valuable antique paintings worth £75,000. His estate after the gift is worth £325,000.

He believes that by making the gift, on his death, his estate is worth £325,000 and thus no IHT liability will arise. However, because Jack retained possession and enjoyment of the painting, which continued to remain in his study, on his death, his estate continued to be £400,000 (not £325,000) and an IHT charge would arise.

It is important to note that survival of the seven year period referred to above does not preclude a GWR from arising.

Pre-owned assets tax

But even where, by clever structuring, it may be possible for a gift to be made yet still enjoyed by the donor, thus successfully circumnavigating the GWR provisions, all is still not necessarily well, due to the POAT provisions.
Under those provisions, a donor becomes subject to an annual income tax charge on the ‘benefit’ received by the donor from the gift.
The POAT provisions only apply to land, chattels (e.g., an antique painting) and intangible property; they do not apply if the GWR provisions apply.

Exemptions, reliefs, etc.

Although not outlined in this article, there are various exemptions, let-outs and reliefs available under the GWR and POAT provisions, which need to be checked where they may possibly apply.

Practical tip

It should be noted that no individual can ‘force’ another individual to accept a gift; thus, in the above example, X cannot insist that Y accepts the gift.

Disclaimer: The information provided on AccountingFirms.co.uk is for general informational purposes only and should not be considered professional accounting, tax, or legal advice. Always consult a qualified accountant or tax adviser for advice tailored to your individual circumstances.