Taxation (UK) · The use of exemptions in deferring and minimising inheritance tax liabilities

Potentially Exempt Transfers, Chargeable Lifetime Transfers and Taper Relief

Updated 11 October 2026 · Fact-checked

A gift to an individual is usually a potentially exempt transfer (PET), and a gift into a trust is a chargeable lifetime transfer (CLT). A PET is exempt if the donor survives seven years. A CLT bears 20% tax in life. Death within seven years brings 40% tax, reduced by taper relief after three years.

Understand Potentially Exempt Transfers, Chargeable Lifetime Transfers and Taper Relief

Every lifetime gift that reduces your estate is a transfer of value. IHT treats it in one of three ways. It may be fully exempt, for example the annual exemption. It may be a potentially exempt transfer (PET). Or it may be a chargeable lifetime transfer (CLT).

A PET is mainly a gift from one individual to another individual. No tax is due when you make it. If the donor survives seven years, the gift stays exempt for good. If the donor dies within seven years, the PET becomes chargeable and is taxed at the death rate of 40%.

A CLT is mainly a gift into a trust (a discretionary trust, for example). It is taxable straight away. Tax is 20% on the amount above the available nil rate band of £325,000, and it is cumulative over the previous seven years. If the donor pays the tax, the gift is grossed up. If the donee pays, no gross up is needed.

If the donor dies within seven years of a PET or a CLT, the gift is taxed again at 40%, using the nil rate band left after earlier gifts. Taper relief then cuts that death tax if the donor lived more than three years after the gift. It reduces the tax, not the value of the gift. Tax paid in life on a CLT is credited against the death tax, but is never refunded.

The taper bands are: more than 3 but less than 4 years, 20%; more than 4 but less than 5, 40%; more than 5 but less than 6, 60%; more than 6 but less than 7, 80%. Gifts that fall within the nil rate band bear no tax, so taper relief gives nothing on that part. Gifts still count in the seven-year cumulation even when taper relief applies.

Key rules to remember

Nil rate band: £325,000; Applies to chargeable transfers in the seven years before each transfer. The residence nil rate band (£175,000) is for the death estate, not for lifetime gifts.
Lifetime rate (CLT): 20% on the excess over the available nil rate band; If the donor pays the tax, gross up the net excess: tax = net excess × 20 ÷ 80.
Death rate: 40% on the excess over the available nil rate band; Applies to PETs that fail and to CLTs where the donor dies within seven years.
Taper relief: Death tax × (1 − taper %); More than 3 but less than 4 years: 20%. More than 4 but less than 5: 40%. More than 5 but less than 6: 60%. More than 6 but less than 7: 80%. Three years or less: no relief.
Net chargeable transfer: Value lost − annual exemptions (current year and unused previous year) − other exemptions; The exemptions are used against the earliest gift in the tax year. A PET only uses them if it later becomes chargeable.
Additional tax on a CLT at death: Death tax after taper − lifetime tax paid (not below nil); No refund if the lifetime tax is higher.

How to solve Potentially Exempt Transfers, Chargeable Lifetime Transfers and Taper Relief questions

Use this order for any question on lifetime gifts and death within seven years.

1List the gifts in date order. Mark each as exempt, PET or CLT, and note the date of death.
2Calculate the value of each gift as the loss to the donor's estate, then deduct the exemptions. The annual exemption is £3,000 for the current year, plus any unused amount from the previous year. Deduct it from the earliest gift first.
3For each CLT, add up the chargeable transfers in the seven years before the gift. Use the remaining nil rate band to find the excess, then tax it at 20%, grossing up if the donor pays.
4If the donor survived seven years, a PET is exempt. Check whether any CLT falls out of the cumulation for later gifts.
5If the donor died within seven years, work through the gifts in date order. For each one, find the nil rate band left after earlier chargeable transfers in the seven years before that gift. Tax the excess at 40%.
6Work out the full years between gift and death. Apply taper relief to the tax if it is more than 3 years, then deduct any lifetime tax paid on a CLT. The result cannot go below nil.
7State who pays and when. Add interest at 8.50% on underpaid tax if the question asks for it.

Quickest way: Three-column gift schedule

When to use it: Use it when there are several gifts and a date of death within seven years of at least one gift.

Draw columns for date, type (PET or CLT) and net value after exemptions.
Add a running total of chargeable transfers in the previous seven years for each gift. This gives the nil rate band available.
Compute the tax at 40%, then multiply by (1 − taper %), and deduct lifetime tax. Check the years: under 3 means no taper.

Common mistakes in Potentially Exempt Transfers, Chargeable Lifetime Transfers and Taper Relief

Applying taper relief to the value of the gift.
The word 'reduction' suggests the gift itself falls.
Fix: Work out the 40% tax first, then reduce the tax. The full gift value still counts in the cumulation for later gifts.
Giving taper relief when death is within three years.
Students remember the percentages but forget the three-year threshold.
Fix: Count the full years first. Three years or less means no relief, so the full 40% applies.
Forgetting to gross up lifetime tax when the donor pays.
The 20% rate is applied straight to the excess.
Fix: If the donor pays, tax = net excess × 20 ÷ 80. If the donee pays, use 20% of the excess.
Refunding lifetime tax when the death tax is lower.
Students treat the lifetime tax as a payment on account.
Fix: Deduct the lifetime tax paid from the death tax after taper, but stop at nil. Nothing is repaid.
Using the full £325,000 nil rate band for every gift.
The band is seen as renewed for each gift.
Fix: Deduct chargeable transfers made in the seven years before the gift. Only the remainder is available.
Using the residence nil rate band on lifetime gifts.
Both bands appear in the rates table.
Fix: The £175,000 residence band belongs to the death estate only, not to lifetime transfers.

Worked examples

Example 1

Alice gave £500,000 to her son on 1 August 2020. She had made no earlier gifts and her annual exemptions for 2020/21 and 2019/20 were unused. Alice died on 1 March 2025. Calculate the IHT due on the gift.

Show the solution

The gift is to an individual, so it is a PET. Death is within seven years, so it becomes chargeable at 40%.
Deduct the annual exemptions: £500,000 − £3,000 − £3,000 = £494,000.
No chargeable transfers in the previous seven years, so the full nil rate band of £325,000 is available. Excess = £494,000 − £325,000 = £169,000.
Tax at 40% = £169,000 × 40% = £67,600.
Time between gift and death is 4 years 7 months, which is more than 4 but less than 5 years. Taper relief is 40%.
Tax after taper = £67,600 × 60% = £40,560.

Answer: IHT of £40,560, payable by the son.

Example 2

Bob put £400,000 into a discretionary trust on 1 July 2019 and paid any lifetime tax himself. He had made no earlier gifts and his annual exemptions for 2019/20 and 2018/19 were unused. Bob died on 1 February 2024. Calculate the lifetime tax and the additional tax due on death.

Show the solution

A gift to a trust is a CLT. Net value = £400,000 − £3,000 − £3,000 = £394,000.
Lifetime tax: excess over the £325,000 nil rate band = £394,000 − £325,000 = £69,000. Bob pays the tax, so gross up: £69,000 × 20 ÷ 80 = £17,250.
Gross chargeable transfer = £394,000 + £17,250 = £411,250.
Death within seven years. Death tax at 40%: (£411,250 − £325,000) = £86,250 × 40% = £34,500.
Time between gift and death is 4 years 7 months, so taper relief is 40%. Tax after taper = £34,500 × 60% = £20,700.
Deduct the lifetime tax paid: £20,700 − £17,250 = £3,450.

Answer: Lifetime tax £17,250. Additional tax due on death £3,450.

Exam tips

In objective test questions, first decide PET or CLT. The type fixes whether any tax is due at the time of the gift.
Count the full years between gift and death before choosing the taper percentage. Check the tax rates table: it gives the bands and percentages.
Always check whether the gift exceeds the available nil rate band. If it does not, taper relief gives no benefit.
In Section C answers, lay out a date-ordered schedule with clear labels. Marks go for the exemption, the nil rate band left, the 40% tax, the taper and the credit for lifetime tax.
State who pays and the due dates when asked. For a PET that fails, the donee is primarily liable, and tax is due six months after the end of the month of death. Unpaid tax carries interest at 8.50%.

Practice questions from The use of exemptions in deferring and minimising inheritance tax liabilities

Potentially Exempt Transfers, Chargeable Lifetime Transfers and Taper Relief in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Strategic ProfessionalLifetime Transfers: PETs, CLTs and Exemptions

Potentially Exempt Transfers, Chargeable Lifetime Transfers and Taper Relief: frequently asked questions

What is the difference between a PET and a CLT?

A PET is mainly a gift to another individual and has no tax when made. A CLT is mainly a gift into a trust and bears lifetime tax of 20% above the nil rate band. Both can be taxed at 40% if the donor dies within seven years.

How does taper relief work for IHT?

Taper relief reduces the death tax on a gift, not its value. Nothing is given for death within three years. After that the reduction is 20%, 40%, 60% or 80% as each further full year passes, up to seven years.

Does taper relief help if the gift is below the nil rate band?

No. If the gift is covered by the available nil rate band, there is no death tax to reduce. The gift still uses up the band for later gifts and for the death estate.

When is IHT due on a gift if the donor dies within seven years?

Extra tax on a failed PET or a CLT is due six months after the end of the month of death. If it is paid late, interest runs at the underpaid rate, which is given as 8.50%. The donee is primarily liable for the tax on a PET.