Failed potentially exempt transfer: tax with taper relief (IHTA 1984 s.7(4))
On 1 March 2022 Babatunde gave £525,000 in cash to his son, Femi. He made no other lifetime gifts. Babatunde died on 1 September 2026, domiciled in England. Assume a nil-rate band of £325,000 both at the date of the gift and at death, a death rate of 40%, and ignore the annual exemption and all other exemptions and reliefs.
How much inheritance tax is payable on the gift to Femi as a result of Babatunde's death?
Choose one answer to see the reasoning.
Worked answer
Correct answer B: £48,000.
THE RULE TO REMEMBER
A PET becoming chargeable within seven years of death is taxed at the death rate, reduced by taper to 80%, 60%, 40% or 20% for gifts made 3-4, 4-5, 5-6 or 6-7 years before death.
Failed potentially exempt transfer: tax with taper relief (IHTA 1984 s.7(4))
The outright gift to Femi was a potentially exempt transfer (PET). It becomes chargeable because Babatunde died within seven years. As his first chargeable transfer, it uses the nil-rate band: £525,000 − £325,000 = £200,000 is taxed at 40%, giving £80,000 before taper. Under s.7(4) Inheritance Tax Act 1984, where a chargeable transfer was made within seven years of death but more than three years before it, tax is charged at a percentage of the full rate. The gift was made four years and six months before death, so it falls within 'more than four but not more than five years', where the tax is charged at 60% of the rate. £80,000 × 60% = £48,000. Taper relief reduces the tax on the gift itself; it does not reduce the value transferred or the nil-rate band used. The donee, Femi, is primarily liable for this tax.
Why A is wrong: This ignores taper relief, which applies because the gift was made more than three years before death.
Why C is wrong: This charges 40% of the tax, the percentage for gifts made more than five but not more than six years before death.
Why D is wrong: This charges 80% of the tax, the percentage for gifts made more than three but not more than four years before death.
Why E is wrong: A PET is exempt only if the donor survives seven years; after three years taper relief reduces the tax but does not remove it.
A little more practice done.
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