If you live in the UK, would it surprise you to know that your PET could be subject to tax when you die? BUT your PET could also be EXEMPT from Inheritance Tax when you die!
So, what’s the difference and why should you care?
Well, let’s start by clarifying what a PET is (and it’s not your dog, cat, budgie, rabbit or fish!). A PET, for Inheritance Tax purposes, is a Potentially Exempt Transfer. Put into plain English, it’s a gift that you make to someone other than your spouse while you are still alive.
A PET becomes exempt 7 years after you make the gift – that’s why it’s called “Potentially Exempt”. Unlike in South Africa, where you pay 20% on any donations greater than R100 000 you make in a year, there is no donations tax equivalent in the UK. What does happen is that, if you die within 7 years of making the gift, that gift become subject to Inheritance Tax.
There are a few deductions your Personal Representative (South Africans read Executor) can claim but it’s important that they have the information. Just like making sure you have a valid will, its equally as important to know when and to whom you have made gifts of more than £250.
The Inheritance Tax rules in South Africa are relatively simple but if you live in the UK it’s a LOT more complex. PETs and CLTs have different rules; trusts have over a thousand years of legislation behind them; estate planning in the UK is an important task that even SA immigrants need to be thinking about. And the earlier you start the better – especially the use of trusts to shelter the capital growth of your long-term wealth.
By contrast, the use of trusts in South Africa for estate planning has become a relatively marginal exercise and needs to be thought through VERY carefully. SARS hates trusts and have made them extremely tax inefficient. Those people locked into older trust structures would do well to take a close look at them and actively pursue strategies to unwind them. I’m not saying that all SA trusts now no longer have value or serve a purpose! I AM saying that they need to be looked at in the light of rules that have changed substantially over the years and properly restructured as opportunity arises.
So – back to your PETs. If you die within 7 years of making a gift in excess of £6 000 the recipient of that gift could well face a tax issue. If you die after that, those gifts are free from any form of donations or inheritance tax (in the UK anyway)
That being said, don’t leave your estate planning to chance and make sure your records are kept up to date. Your Personal Representative/Executor needs a lot of information in order to wrap up your estate and the more you can leave for them the quicker, easier and cheaper it will be. Doing simple things now could save your heirs a fair amount of money.
Need help – well we can meet your needs in both SA and the UK so feel free to contact us but make sure you get hold of someone to talk this through with and develop a strategy. I am always conscious of a quote I heard shortly after the worldwide financial crisis of 2008 – “hope is NOT a strategy!” You can’t hope it will all work out OK in the end – you need to make your plan and then work your plan.
For a free PET tracker pop over to www.sauktax.co.uk, lodge an enquiry and we will email one through to you.