Commentary

I3.527 The special rate—calculation

IHT, trusts and estates

I3.527 The special rate—calculation

I3.527 The special rate—calculation

The effect of IHTA 1984, s 54A (see I3.526) is that the aggregate of the settlor's chargeable transfers in the seven years ending with the date of the original potentially exempt transfer (PET) is substituted for the aggregate of chargeable transfers of the person who was entitled to the interest in possession (often called the 'life tenant'). However, this is only the case if that results in more tax being paid1 (see Example 1 below).

This is subject to the point that the special rate calculation always uses the rates at the time of the termination of the interest in possession2. Thus the likelihood of the special rate applying where the termination of the interest in possession is on the death of the person entitled to it is less than where the termination is during the life of that person (because death rates are double lifetime rates).

Where the settlor or the life tenant dies within seven years of the termination, the calculations to work out whether the alternative special rate of tax under IHTA 1984, s 54A applies are not affected. If the chosen aggregation so chosen is that of the person who has died within the seven years is there a calculation of whether and how much (if any) additional tax is payable by reason of his death (see Examples 1 and 2 below). This is provided by IHTA 1984, s 54B(1) (death of the settlor) and IHTA 1984, s 54B(2) (death of the person

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