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The effect of IHTA 1984, s 54A (see I3.526) is that the aggregate of the settlor's chargeable transfers in the seven years ending with the date of the original potentially exempt transfer (PET) is substituted for the aggregate of chargeable transfers of the person who was entitled to the interest in possession (often called the 'life tenant'). However, this is only the case if that results in more tax being paid¹ (see Example 1 below).

This is subject to the point that the special rate calculation always uses the rates at the time of the termination of the interest in possession². Thus the likelihood of the special rate applying where the termination of the interest in possession is on the death of the person entitled to it is less than where the termination is during the life of that person (because death rates are double lifetime rates).

Where the settlor or the life tenant dies within seven years of the termination, the calculations to work out whether the alternative special rate of tax under IHTA