Q&As

When calculating inheritance tax (IHT) due on a failed potentially exempt transfer (PET), does the amount of the capital gains tax liability arising on the lifetime transfer reduce the value of the failed PET for IHT purposes on the transferor’s death?

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Published on LexisPSL on 02/05/2018

The following Private Client Q&A provides comprehensive and up to date legal information covering:

  • When calculating inheritance tax (IHT) due on a failed potentially exempt transfer (PET), does the amount of the capital gains tax liability arising on the lifetime transfer reduce the value of the failed PET for IHT purposes on the transferor’s death?
  • How is a failed PET valued after death?
  • How is CGT calculated on a lifetime gift?

When calculating inheritance tax (IHT) due on a failed potentially exempt transfer (PET), does the amount of the capital gains tax liability arising on the lifetime transfer reduce the value of the failed PET for IHT purposes on the transferor’s death?

How is a failed PET valued after death?

A gift by an individual to another individual (or to certain classes of 'favoured settlements'), is a potentially exempt transfer (PET). A PET made seven years or more before the death of the transferor is exempt under section 3A of the Inheritance Tax Act 1984.

If, however, the transferor dies within seven years of the gift, then inheritance tax (IHT) becomes payable and the applicable rate of IHT (currently 40%) is reduced according to the length of time which has elapsed between the making of the gift and the death of the deceased. This ‘sliding scale’ is set out in the table below:

Transfers madeCharged at percentage of applicable rate
Less than three years before death100%
Between three and four years before death80%
Between four and five years before death60%
Between five and six years before

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