ACCA Advanced Taxation (ATX) Practice Exam

What happens to a previous PET if the donor dies within seven years of the original gift?

1. It becomes non-chargeable

2. Only the later PET is chargeable

3. The original and later deemed PET both become chargeable

4. It creates an additional tax credit

The correct answer is: The original and later deemed PET both become chargeable

When a donor makes a gift, known as a Potentially Exempt Transfer (PET), it typically becomes exempt from Inheritance Tax (IHT) if the donor survives for seven years after making the gift. However, if the donor dies within that seven-year period, the PET is included in the donor's estate for IHT purposes, and this is where the concept of a deemed PET comes into play. The original gift that was a PET will be considered a chargeable transfer if the donor dies within the seven years. Moreover, if the donor made other subsequent gifts during this period, each of those gifts would also be deemed chargeable transfers, known as later PETs. Therefore, both the original PET and any later PETs made by the donor before their death become chargeable for IHT purposes. This is a fundamental aspect of IHT planning and understanding the implications of making gifts, as it underscores the importance of surviving beyond the seven-year threshold to ensure that gifts do not attract tax liability upon death. Thus, in the event of the donor's death within that timeframe, both the original PET and any additional gifts made during that span are treated as chargeable. The choice that accurately reflects this situation is that both the original and later