ACCA Advanced Taxation (ATX) Practice Exam

Do potentially exempt transfers (PETs) utilize annual exemption during an individual's lifetime?

1. Yes, PETs can use annual exemption

2. No, they cannot use annual exemption

3. Only if they are below a certain amount

4. Only after death of the individual

The correct answer is: Yes, PETs can use annual exemption

Potentially exempt transfers (PETs) are gifts that an individual makes during their lifetime that may not be subject to inheritance tax (IHT) if the individual survives for seven years after making the gift. One of the advantages of PETs is that they can utilize the annual exemption, which allows an individual to give away a certain amount each tax year without incurring tax liabilities. The annual exemption enables individuals to make gifts up to a specified limit each tax year free from inheritance tax, regardless of whether those gifts qualify as PETs or are exempt for other reasons. This means that when an individual makes a PET that falls within the annual exemption limit, that amount is not considered part of their estate for inheritance tax purposes at the time of the gift, helping to reduce their overall tax liability. In summary, PETs do indeed benefit from the annual exemption during the individual's lifetime, allowing for effective estate planning and tax mitigation strategies.