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The relationship between the annual exemption and potentially exempt transfers (PETs) is uncertain as a matter of law, as it is affected by two inconsistent provisions of IHTA 1984. The first of these is the general provision in IHTA 1984, s 3A(1)(b) that a transfer can only be a PET if it would otherwise be chargeable (see I3.311, I3.315) — a transfer is not a PET if any other exemption, including annual exemption, applies.

The second of these provisions is the specific provision in IHTA 1984, s 19(3A) that a transfer of value which is potentially exempt is initially left out of account for the purposes of annual exemption, and if it proves to be chargeable is taken into account for annual exemption as if made later in the year than any non-potentially exempt transfer. In other words, the annual exemption is set off against immediately chargeable transfers