Inheritance tax: does the recipient need to pay?

A few years ago father made a gift of assets to his son to reduce his estate for inheritance tax (IHT) purposes. He recently died and his solicitor says that the son might have to pay tax on the gift. If there’s any IHT shouldn’t the estate pay it?

Inheritance tax: does the recipient need to pay?

Lifetime transfers

Most people are aware that if an individual makes a gift to another there’s no inheritance tax (IHT) to pay at the time. The gift is known as a potentially exempt transfer (PET). The trouble is, if the person who made the gift dies in the following seven years the potential exemption is lost and the gift becomes chargeable to IHT.

The legislation says that it’s the recipient of the gift who must pay the IHT. What’s more, they are required to notify HMRC (on Form IHT100 ) within a year following the end of the month in which the person who made the gift died.

In practice, HMRC will not usually insist on an IHT100 but there are exceptions. If an individual received a gift of money or other assets from someone who dies within the following seven years, they should check HMRC’s guidance to see if it will require a Form IHT100.

How much tax?

Where a PET  received becomes chargeable to IHT, it doesn’t automatically mean the recipient will have tax to pay. IHT is calculated on transfers made by the deceased in chronological order and the nil rate band (NRB) (the amount of an estate on which IHT is charged at 0%) is always allocated against the earliest amounts chargeable.

Example. In June 2017 Derek gave his son shares worth £200,000. This was the only gift he made in the seven years prior to his death in March 2021. The £200,000 which started as a PET became chargeable when Derek died. The tax is calculated as follows:

Gift June 2017


IHT annual exemption 2017/18


IHT exemption 2016/17


Chargeable to IHT


Nil rate band for year in which PET became chargeable (2020/21)    


IHT payable by Derek’s son



The good news for Derek’s son is that he has no IHT to pay, the bad news for Derek’s estate is that the former PET has used £194,000 of the NRB, leaving only £131,000 (£325,000 - £194,000) chargeable at 0%. The value of Derek’s estate in excess of this is chargeable at 40%.

Tax payable by recipient

If the PET alone or with earlier PETs made in the seven years before death exceed the IHT NRB, this is payable by the recipient of the PET. For example, if Derek had two other sons and had made gifts of £200,000 to each of them in 2015 and 2016, it would mean none of the NRB would be available for the gift to Derek in 2017. After deducting the annual exemption he would be liable to tax at 40%.

If significant PETs are to be made, it’s important to consider the consequences of their timing. Gifts made at different times can mean that the recipients of later ones might face unexpected IHT bills whereas those receiving them earlier pay nothing. IHT planning through PETs needs to be done openly to ensure that all the parties involved understand the tax consequences.