ACCA Advanced Taxation (ATX) Practice Exam

When are annual exemptions applicable for potentially exempt transfers (PETs)?

1. Only after death of the individual

2. Throughout the individual’s lifetime

3. Once the transfer exceeds a certain limit

4. Only for immediate family gifts

The correct answer is: Throughout the individual’s lifetime

Annual exemptions for potentially exempt transfers (PETs) apply throughout the individual’s lifetime, which is why that choice is the correct answer. This means that individuals can make gifts up to a certain value each tax year without those gifts being immediately subject to inheritance tax. The exemption is available regardless of whether the gifts are made to family, friends, or other individuals, as long as the total value of gifts in a tax year does not exceed the exemption threshold. The significance of these exemptions is that they provide a way for individuals to reduce their taxable estate before death, as gifts made while the individual is alive are not included in their estate for inheritance tax purposes if they survive for seven years after the transfer. Other choices do not accurately reflect how annual exemptions function: they are not limited to the period after death, do not depend on exceeding a specific limit for application, and are not restricted to gifts made to immediate family. Instead, they enable lifetime planning for tax efficiency, showcasing the flexibility individuals have in managing their assets while living.