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You must make separate calculations of the total tax payable as a result of the death

• charging the reacquired property in the death estate but ignoring the lifetime charge on the failed PET
• charging the PET as a lifetime transfer but ignoring the reacquired property in the death estate.

Retain the charge on the calculation which produces the higher amount of tax.

Note that the comparison is not between the tax payable on the failed PET and the tax payable on the reacquired property, but between the total tax payable on the death on the two bases.

Example

July 2007: Aaron makes a PET of 拢300,000 to Beccy.

January 2008: Aaron makes an immediately chargeable gift of 拢340,000 to a discretionary trust. The tax on 拢340,000 at half death rates is 拢8,000.

May 2009: Beccy dies leaving an estate of 拢325,000 which passes wholly to Aaron

May 2010: Aaron dies leaving an estate of 拢700,000, no part of which is exempt.

First calculation

Ignore the lifetime charge on the failed PET and charge the returned 拢300,000 as part of Aaron鈥檚 estate on death:

July 2007: 拢300,000 PET is ignored so tax is Nil.

Jan 2008: 拢340,000 chargeable transfer

拢340,000 - 拢325,000 (nil-rate band at date of death) = 拢15,000 x 40% = 拢6,000

This is less then the lifetime tax of 拢8,000, so additional tax is nil.

On death in May 2010:

Jan 2008 transfer = 拢340,000

Death estate = 拢700,000

Total = 拢1,040,000

拢1,040,000 - 拢325,000 (nil-rate band at date of death) = 拢715,000 x 40% = 拢286,000

Less 拢6,000 tax on 拢340,000 transfer = 拢280,000

Nil plus 拢280,000 is therefore the total amount of tax to pay as a result of Aaron鈥檚 death = 拢280,000.

Second calculation

Charge the failed PET but ignore the 拢300,000 returned to Aarons鈥檚 estate on Beccy鈥檚 death:

July 2007: 拢300,000 PET is sub-threshold and tax is Nil

Jan 2008: 拢340,000 chargeable transfer

Total of chargeable transfers = 拢640,000

拢640,000 - 拢325,000 (nil-rate band at date of death) = 拢315,000 x 40% = 拢126,000

Less tax on 拢300,000 (Nil) and less lifetime tax paid (拢8,000) = 拢118,000

On death in May 2010:

2007 PET = 拢300,000

2008 transfer = 拢340,000

Death estate (ignoring returned 拢300,000) = 拢400,000

Total = 拢1,040,000

拢1,040,000 - 拢325,000 (nil-rate band at date of death) = 拢715,000 x 40% = 拢286,000

Less 拢126,000 tax on 拢640,000 = 拢160,000

拢160,000 plus 拢118,000 = 拢278,000 is therefore the total tax to pay as a result of Aaron鈥檚 death.

The first calculation is the preferred option, so you would retain that tax calculation and reduce the second to nil.