Lifetime transfers: the charge to tax: potentially exempt transfers (PETs): tax treatment of a PET followed by death
If the transferor dies within seven years of making the PET (IHTM04057),
- the potential exemption is lost and the PET becomes a chargeable transfer
- the transfer must be cumulated with the death estate (IHTM14503)
- the transfer must be cumulated with any later lifetime transfers, and
- the value transferred (after cumulation with earlier transfers) may become chargeable in its own right (IHTM14513).
Matthew makes the following transfers (after exemptions and reliefs):
£170,000 to his son, Kenneth, in August 2007
£170,000 to his daughter, Lalage, in February 2008.
Matthew dies with a death estate of £225,000 in October 2010 when the IHT nil rate band is £325,000.
The gift to Kenneth becomes a chargeable transfer but is covered by the IHT nil rate band. It uses £170,000 of the nil rate band leaving only £155,000 to set against the gift to Lalage. The excess of £15,000 becomes chargeable in its own right and is cumulated with the death estate (£225,000) to calculate the IHT payable. IHT is charged on the cumulative total of £240,000.
Although the transferor’s death triggers the charge to tax,
- you do not treat the lifetime transfer as a transfer made on death for the general purposes of the IHTA
- you do not deem the gifted property to be part of the transferor’s death estate, except where the benefit of a Gift with Reservation (GWR) (IHTM14301) continues to the date of death.
The guidance at (IHTM30011) explains who is liable to pay the tax on a PET