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HMRC internal manual

Inheritance Tax Manual

Lifetime transfers: deemed potentially exempt transfers

The legislation also provides that the following transfers shall be treated as if they were potentially exempt transfers (PETs). (IHTM04057) This means that the individual (IHTM04053) has made a PET and not simply a transfer of value so the conditions to qualify as a PET do not have to be considered. The transfers are

  • the lifetime cessation of a reservation in gift with reservation property, (IHTM04072) FA86/S102 (4), and
  • discharge or reduction of a debt subject to abatement FA86/S103 (5).

Because these transfers are deemed to be PETs, and a PET is transfer of value (IHTM04024) that would, apart from IHTA84/S3A be a chargeable transfer, (IHTM04027) they join the charging structure as chargeable transfers. This means that no exemptions (IHTM11000) may be deducted.

The same would apply for reliefs such as agricultural relief (IHTM24000) and business relief (IHTM25000). However, these reliefs are specifically available against the deemed PET that arises on the cessation of reservation (FA86/SCH20/PARA8).

There is no corresponding provision for the reduction of a debt subject to abatement. Any transfer made in this way is not entitled to any exemptions or reliefs.

Example 1

Ellie transferred the farmhouse in which she was living to her son Alfred on 1 June 2000. Alfred did not occupy the property with Ellie. Ellie continued to live at the farmhouse and managed all farming operations. Ellie reserves a benefit in the gifted property, the farmhouse. 

On 1 June 2014 Ellie moved out of the farmhouse and in to a nursing home. Alfred moves in to the farmhouse to take over the management and day to day running of the farm. When Ellie moved in to the nursing home she ceased to reside in the property, and at that time there is a deemed PET by virtue of FA86/S102 (4).

No exemptions may be deducted from the deemed PET on 1 June 2014, but agricultural relief may be due FA86/SCH20/PARA 8 (IHTM24200).

Example 2

William transfers £100,000 to his son Peter by way of gift. Some months later William asks Peter for a loan of £50,000 from the money transferred to complete on a new property purchase. William agrees to repay Peter the money lent at a later date.

William repays £25,000 of the outstanding debt to Peter prior to his death. The balance of the loan outstanding at the date of death is subject to abatement under FA86/s103(1). 

The repayment of £25,000 by William to Peter will also be a deemed PET under the provisions of FA86/s103 (5). No exemptions or reliefs can be claimed against the value of the deemed PET.

Double Charging Regulations

If the gift is a PET which becomes chargeable following the death of the transferor within seven years, a charge will arise on both the lifetime transfer and on death. To prevent a double charge to tax, relief under the double charges regulations (IHTM14711 and IHTM14721) may be available.

The regulations provide in effect that the occasion of charge which produces the higher amount of tax can be used. Separate calculations are needed to determine this. In example 2 above, the calculations are:-

  1. To reduce the liability in accordance with FA86/S103 and ignore the value transferred by the lifetime transfer to the extent of the reduction, and
  2. To charge the lifetime transfer in the usual way but allow the outstanding liability as a deduction without any reduction under S103

If both calculations result in the same amount of Inheritance Tax payable, the calculation which disregards the lifetime charge in whole, or in part, is used (IHTM14731).