Potentially exempt transfer (UK inheritance tax)
A potentially exempt transfer is a qualifying lifetime transfer, commonly an outright gift by an individual to another individual, that is not immediately chargeable to inheritance tax. If the donor survives at least seven years, it becomes exempt; if the donor dies within seven years, it becomes a chargeable transfer. Whether tax is actually due depends on exemptions, available nil rate band and the other facts. Where applicable, taper relief reduces tax on the gift, not the gift’s value. Transfers with reservation of benefit and particular trusts have separate rules.
Worked example
An individual makes a qualifying outright gift to a friend and survives for eight years. Subject to the facts and any separate reservation-of-benefit rules, the potentially exempt transfer becomes exempt; no inheritance-tax liability is calculated on that transfer merely because it was large.
Common mistake
Assuming every lifetime gift is a PET, or reducing the value of a failed PET by taper relief instead of applying any relief to the tax due.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | TX (UK) | Direct | June 2026–June 2027 |