Inheritance Tax Act 1984 section 54A

Special rate of charge where settled property affected by potentially exempt transfer

Section 54A is an anti-avoidance provision that imposes a special rate of inheritance tax charge where settled property with an interest in possession is connected to a potentially exempt transfer (PET) made by the settlor, and the interest in possession subsequently comes to an end.

• Where a settlor created a trust with an interest in possession through a PET on or after 17 March 1987, and that interest later ends within seven years while the settlor is still alive, a special rate of tax may apply to the resulting chargeable transfer.
• The special rate only applies if, when the interest in possession ends, the property falls into a trust with no qualifying interest in possession and remains in that state for at least six months — that is, it has not reverted to an individual or a trust with a qualifying interest in possession.
• The tax charged is the higher of the normal tax calculation and an alternative calculation based on the settlor's cumulative total of chargeable transfers at the date of the original PET, using rates at half the normal lifetime rate.
• For interests in possession acquired on or after 22 March 2006, the charge on death only applies if the interest is a disabled person's interest or a transitional serial interest.

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