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Example 1

In January 2010, Alistair gives a holiday home worth 拢400,000 (after annual exemption (IHTM14141) to Brenda but continues to use the home on a regular basis. The potentially exempt transfer (PET) (IHTM04057) is also a GWR for Inheritance Tax.

Alistair dies in November 2012, having continued to use the holiday home up to his death. It is then worth 拢450,000 and is treated as part of his estate. The remaining death estate is valued at 拢500,000. There are no other gifts.

First calculation

Ignore the lifetime charge and charge the holiday home as part of Alistair鈥檚 death estate.

Jan 2010 - gift ignored, so tax nil

Nov 2012 - tax on death estate of 拢950,000 = 拢250,000 (total tax)

Second calculation

Charge the lifetime gift and ignore the holiday home as part of the death estate.

Jan 2010 - tax on 拢400,000 gift = 拢30,000

Nov 2012 - tax on death estate of 拢500,000 (no nil rate band available) = 拢200,000

Total tax 拢230,000.

Conclusion

The first calculation charging the GWR property as part of the death estate results in the greater amount of tax being payable. Tax is therefore charged on the basis of the first calculation, with the value of the PET being reduced to nil.