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Taxation (UK) · The liabilities arising on chargeable lifetime transfers and on the death of an individual

Potentially Exempt Transfers and Taper Relief Explained

Updated 11 October 2026 · Fact-checked

A potentially exempt transfer (PET) is a lifetime gift to another individual that has no immediate tax. If the donor dies within seven years, it becomes chargeable. Tax is worked out at 40% above the available nil rate band, then reduced by taper relief if death was more than three years after the gift.

Understand Potentially Exempt Transfers and Taper Relief

Most lifetime gifts between individuals are potentially exempt transfers (PETs). When you make one, there is no inheritance tax (IHT) at once. The gift is treated as exempt, but only on the condition that you survive seven years.

If the donor dies within seven years of the gift, the PET becomes a failed PET and is chargeable. Tax is calculated as if it were a chargeable transfer, using the death rate of 40% above the nil rate band of £325,000. The person who received the gift (the donee) is primarily liable for this tax.

The difference between a PET and a chargeable lifetime transfer (CLT) is the recipient. A gift to another individual is normally a PET. A gift to a trust is normally a CLT, which is taxed at once at 20% on the excess over the nil rate band (the lifetime rate). A CLT can also attract extra tax if the donor dies within seven years.

Taper relief reduces the tax, not the value of the gift. It applies only where death is more than three years after the gift. The reduction is 20% for 3 to 4 years, 40% for 4 to 5, 60% for 5 to 6 and 80% for 6 to 7 years. Death in the first three years gets no reduction.

Taper relief only helps if there is tax to reduce. If the gift, added to earlier chargeable transfers in the seven years before it, falls within the nil rate band, the tax is nil and taper relief is irrelevant. A failed PET also uses up nil rate band, so less is left for the death estate.

Key rules to remember

Seven-year rule
PET chargeable only if donor dies within 7 years of the gift
If the donor survives seven years, the PET is fully exempt.
Tax on failed PET
Tax before taper = (Gift after exemptions − available nil rate band) × 40%, where available nil rate band = £325,000 − chargeable transfers in the 7 years before the gift (not below nil)
Compute the tax on the failed PET only. Do not add earlier chargeable transfers into the gift. They only reduce the nil rate band, which is £325,000 less earlier chargeable transfers in the seven years before the gift. If earlier transfers already equal or exceed £325,000, the available band is nil and the whole gift is taxed.
Taper relief
Tax payable = Tax before taper × (100% − reduction %)
Reduction: 0–3 years nil; 3–4 years 20%; 4–5 years 40%; 5–6 years 60%; 6–7 years 80%.
Death rate and lifetime rate
Death 40%; lifetime 20%
A failed PET always uses the 40% death rate.
Annual exemption
£3,000 per tax year, plus unused amount from the previous year
Deduct from the gift first. Apply to the earliest gift in the year. This is the standard ACCA rule; it is not in the rates table, so check the question.

How to solve Potentially Exempt Transfers and Taper Relief questions

Use this method for any question on a PET that may become chargeable.

  1. 1List all lifetime gifts in date order and label each as a PET (to an individual) or CLT (to a trust).
  2. 2Check the date of death. Work out the time from each gift to death in complete years and months.
  3. 3If death is within seven years, the PET is chargeable. If not, it is exempt and stops here.
  4. 4Deduct exemptions (annual exemption, plus any others given) from each gift, earliest first, to get the transfer value.
  5. 5Find the nil rate band available: £325,000 less chargeable transfers in the seven years before that gift.
  6. 6Calculate tax at 40% on the excess over the available nil rate band.
  7. 7Apply taper relief based on the time from gift to death. Reduce the tax, not the gift.
  8. 8State who pays (the donee for a PET) and note how much nil rate band is left for the death estate.

Quickest way: Timeline and band check

When to use it: Use this for Section B objective test cases where you must get a figure quickly.

  1. Draw a timeline with each gift and the death date.
  2. Check seven years. If outside, the answer is nil tax.
  3. Check if the gift is covered by the nil rate band after earlier gifts. If yes, the tax is nil.
  4. Multiply only the excess by 40%.
  5. Read the taper percentage from the table and multiply the tax by (100% − reduction).

Common mistakes in Potentially Exempt Transfers and Taper Relief

  • Applying taper relief to the value of the gift instead of the tax

    The word 'relief' suggests the gift is reduced.

    Fix: Work out the tax first, then reduce the tax by the taper percentage.

  • Giving taper relief for death within three years

    Students apply the 20% reduction to any death after the gift.

    Fix: The first reduction starts only when death is more than three years after the gift.

  • Applying the reduction percentage as the amount payable

    60% reduction is mixed up with 60% payable.

    Fix: Payable = 100% minus the reduction. A 60% reduction means 40% of the tax is payable.

  • Forgetting earlier chargeable transfers when finding the nil rate band

    Each gift is treated in isolation.

    Fix: Look back seven years from each gift and deduct chargeable transfers made in that period from £325,000.

  • Using 20% instead of 40% on a failed PET

    Students confuse the lifetime rate used for CLTs with the rate for gifts becoming chargeable on death.

    Fix: Use the death rate of 40% on a failed PET.

  • Claiming taper relief where the gift is within the nil rate band

    Students assume the relief always applies.

    Fix: If the tax is nil, state that no tax is payable. Taper relief only reduces tax that exists.

Worked examples

Example 1

Anna gave her son £400,000 on 1 August 2020. This was after all exemptions and she had made no earlier gifts. Anna died on 10 November 2025. Calculate the IHT payable on the gift.

Show the solution
  1. The gift to an individual is a PET. Death was within seven years, so it is chargeable.
  2. Time from gift to death: 5 years 3 months, so taper relief is 60%.
  3. Nil rate band available: £325,000, as there were no earlier chargeable transfers.
  4. Excess: £400,000 − £325,000 = £75,000.
  5. Tax before taper: £75,000 × 40% = £30,000.
  6. Tax payable after taper: £30,000 × (100% − 60%) = £12,000.

Answer: IHT of £12,000 is payable, by the son. No nil rate band is left for Anna's death estate.

Example 2

Ben made a gift of £200,000 to a trust on 1 May 2018 and a gift of £325,000 to his daughter on 1 March 2021. Both figures are after exemptions. Ben died on 1 January 2025. Calculate the additional IHT on death arising from the gifts.

Show the solution
  1. The 2018 gift to a trust is a CLT. It is within the £325,000 nil rate band, so no lifetime tax was paid.
  2. The 2021 gift to his daughter is a PET. Death was within seven years, so it is chargeable.
  3. For the CLT, the death was 6 years 8 months after the gift. It is within seven years, but the CLT was covered by the nil rate band, so there is no additional tax.
  4. For the PET, the nil rate band available is £325,000 − £200,000 (the CLT was within seven years before the PET) = £125,000.
  5. Excess: £325,000 − £125,000 = £200,000.
  6. Tax before taper: £200,000 × 40% = £80,000.
  7. The PET was made 3 years 10 months before death, so taper relief is 20%.
  8. Tax payable: £80,000 × 80% = £64,000.

Answer: No additional tax on the CLT; £64,000 on the failed PET, payable by the daughter. No nil rate band is left for Ben's death estate because £525,000 of gifts were made in the seven years before death.

Exam tips

  • Always check gift recipient first: an individual means PET, a trust means CLT.
  • Count complete years carefully. Death after exactly 3 years falls in the 'more than 3 years' band only if it is more than three years.
  • Show each step, so you still earn marks if your final figure is off. In objective tests there are no partial marks, so check the arithmetic twice.
  • Say clearly when no tax is due because the gift is covered by the nil rate band, and that taper relief therefore does not matter.
  • Remember the donee pays tax on a failed PET, and a failed PET uses nil rate band before the death estate does.

Practice questions from The liabilities arising on chargeable lifetime transfers and on the death of an individual

Potentially Exempt Transfers and Taper Relief: frequently asked questions

What is the difference between a PET and a CLT?

A PET is normally a gift to another individual and has no tax at the time. A CLT is normally a gift to a trust and is taxed at once at 20% above the nil rate band. Both can attract further tax at 40% (with taper relief) if the donor dies within seven years.

How does taper relief work for inheritance tax?

Taper relief reduces the tax on a gift that has become chargeable because the donor died within seven years. It applies only if death is more than three years after the gift. The reduction is 20%, 40%, 60% or 80% depending on how many years passed.

Does taper relief reduce the value of the gift?

No. The full value of the gift still uses up the nil rate band. Taper relief only reduces the tax calculated on the excess above the nil rate band.

Who pays the tax if a PET becomes chargeable?

The donee, the person who received the gift, is primarily liable. The tax is due after the death of the donor.