ACCA Advanced Taxation (ATX) Practice Exam

Does a PET use the nil rate band during death or lifetime calculations?

1. It does not affect the nil rate band for lifetime calculations

2. It uses the nil rate band only at death

3. It uses the nil rate band at both death and lifetime

4. It is exempt from nil rate band calculations entirely

The correct answer is: It uses the nil rate band only at death

A Potentially Exempt Transfer (PET) is a gift made during an individual's lifetime which might be exempt from Inheritance Tax (IHT) if the donor survives for seven years after making the transfer. The key factor here is how the nil rate band applies in the context of a PET. The nil rate band is the threshold up to which an individual's estate is not subject to IHT. For lifetime gifts, specifically PETs, the nil rate band is not utilized at the time of the gift. Instead, it only comes into play when the person who made the transfer passes away. If the donor dies within seven years of making a PET, the value of the PET is included in the calculation of their estate for IHT purposes. Thus, while the PET itself does not affect the nil rate band at the time of giving, it is only accounted for when the donor dies, meaning the nil rate band is applicable to the estate at that point. Therefore, the correct answer is that it uses the nil rate band only at death.