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HMRC internal manual

Inheritance Tax Manual

Lifetime transfers: the charge to tax: potentially exempt transfers (PETs): special rate

The special rate under IHTA84/S54A relates to potentially exempt transfers into interest in possession (IIP) settlements followed by termination of the interest in possession.

FA86, which introduced PETs (IHTM04057) did not include -

  • transfers into an interest in possession settlement, or
  • claims on the termination of an interest in possession under IHTA84/S52 (1).

These events were included in the category of PETs by The Finance (No.2) Act 1987 and the provisions of IHTA84/S54A and IHTA84/S54B , which were brought in at the same time. These special rate provisions apply to transfers made after 16 March 1987.

Ss54A and B operate to ensure that a settlor with a high personal cumulative total cannot

  • by initially using a PET
  • take any advantage from putting property on IIP trusts
  • for a person with a low personal cumulative total (or none at all)
  • where the property, on the later termination of the interest in possession,
  • becomes held on discretionary trusts.

In such cases the rate to be used at the claim under IHTA84/S52 (1) on the termination of the interest in possession will be the higher of

  • the rate as calculated with the settlor as transferor, and
  • the rate as calculated with the life tenant as (deemed) transferor.

The legislation has changed the behaviour of taxpayers to such an extent that you will very rarely see the point in practice.