ACCA Advanced Taxation (ATX) Practice Exam

Are PETS considered in nil rate band calculations for lifetime tax?

1. True

2. False

3. Only if they exceed a certain amount

4. Only for individuals

The correct answer is: True

The correct assertion that PETs (Potentially Exempt Transfers) are considered in nil rate band calculations for lifetime tax aligns with how the inheritance tax framework operates. When an individual makes a gift, it is classified as a PET if the individual survives for at least seven years after making the gift. During this period, if the individual dies, the value of the PET is included in the estate for inheritance tax purposes. The nil rate band functions as a threshold that allows a certain value of an estate to pass on without incurring inheritance tax. When calculating the total value of an estate, all gifts made in the seven years preceding the death, including PETs, need to be considered. Consequently, if a PET exceeds the nil rate band, it could lead to inheritance tax being payable, underscoring the importance of accounting for these transfers. In essence, recognizing PETs in nil rate band calculations is crucial for accurate tax assessments on lifetime gifts, impacting estate planning strategies. Understanding this incorporation is critical for maximizing tax efficiency and making informed financial decisions regarding the transfer of wealth.