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HMRC internal manual

Capital Gains Manual

Gifts: Inheritance Tax: potentially exempt xfers

The definition of potentially exempt transfer (PET) is in section 3A Inheritance Act 1984. The commonest type of PET is a gift by an individual to another individual. See IHTM04057.

Gifts to and from certain types of settlement may also be PETs. A few specialised settlements are specifically mentioned in section 3A Inheritance Tax Act 1984. Otherwise the commonest type of PET was a gift to or from an interest in possession settlement. These are the settlements that have been most affected by the Finance Act 2006 changes to Inheritance Tax. A life-time gift to an interest in possession settlement made on or after 22 March 2006 will not be a PET. This will significantly increase the number of gifts that qualify for section 260 relief.

A PET will become chargeable to Inheritance Tax if the transferor dies within 7 years of making the gift. If this happens hold-over relief under section 260 is still not available.