Advanced Taxation (UK) · Inheritance tax: the basic principles of computing transfers of value

Lifetime IHT: PETs, CLTs and Exemptions Explained

Updated 11 October 2026 · Fact-checked

A lifetime gift is first reduced by exemptions. What is left is a potentially exempt transfer (PET) if made to an individual, or a chargeable lifetime transfer (CLT) if made to most trusts or to a company. A PET has no tax unless the donor dies within seven years. A CLT is taxed at 20% above the nil rate band.

Understand Lifetime Transfers: PETs, CLTs and Exemptions

Inheritance tax (IHT) taxes the transfer of value. This is the fall in the donor's estate caused by a gift. If you give away an asset worth £100,000, the transfer is the loss to your estate, not the gain to the recipient. That matters when the asset is part of a larger holding, or when you pay the tax yourself.

Every lifetime gift falls into one of three groups. An exempt transfer never attracts IHT, for example a gift to a spouse or civil partner. A potentially exempt transfer (PET) is a gift by an individual to another individual. It is also a gift to certain trusts, but trusts are covered in another topic. A chargeable lifetime transfer (CLT) is most commonly a gift into a relevant property trust, such as a discretionary trust. A gift to a company is also a CLT.

A PET is treated as exempt while the donor is alive. It becomes chargeable only if the donor dies within seven years. A CLT is taxed at once at the lifetime rate of 20% on the excess over the available nil rate band of £325,000. If the donor dies within seven years, extra tax may be due at the death rate of 40%, with taper relief after three years. That later charge is covered in the death topics.

Before deciding PET or CLT, you deduct the exemptions. These are the annual exemption, the small gifts exemption, the marriage exemption and the normal expenditure out of income exemption. They reduce the transfer of value. Exemptions can apply to a gift that would otherwise be a PET, so a PET may itself be reduced to nil.

The key skill is order. Take the gifts in date order. For each gift, deduct the marriage exemption and the other specific exemptions (small gifts, normal expenditure out of income) first. Then deduct the annual exemption, which goes to the earliest gift in the tax year first. Always set the order out clearly. Examiners award marks for the correct sequence and for explaining why the result is a PET or CLT.

Key rules to remember

Transfer of value: Transfer of value = Value of estate before − Value of estate after; This is the loss to the donor's estate. If the donor pays the IHT on a CLT, the tax must be added (grossed up) to the loss.
Annual exemption: £3,000 per tax year, plus any unused amount from the previous year only; The unused amount is carried forward for one year only. The current year's exemption is used first, then the brought forward amount. The £3,000 annual exemption, the £250 small gifts limit and the marriage exemption limits are not in the tax tables ACCA provides. You must learn them.
Small gifts exemption: £250 per recipient per tax year; It cannot be used on a gift that is already covered by another exemption. If the total gifts to one person in the tax year exceed £250, the small gifts exemption does not apply to that person at all.
Marriage exemption: £5,000 from a parent; £2,500 from a grandparent or remoter ancestor, or from a party to the marriage to the other; £1,000 from anyone else; The gift must be made on or in consideration of the marriage. It is one exemption per donor per marriage. These limits are not in the tax tables, so learn them.
Normal expenditure out of income: Exempt if: part of normal expenditure, paid out of income, and the donor keeps their usual standard of living; There is no monetary limit. Keep records. It can cover regular gifts such as life policy premiums for another person.
Lifetime IHT on a CLT: Tax = (Net chargeable amount − available nil rate band) × 20% if the trustees pay; Tax = (Net chargeable amount − available nil rate band) × 20 ÷ 80 if the donor pays; The net chargeable amount is the gift after exemptions. The nil rate band is £325,000 less CLTs in the previous seven years. Only the net excess over the nil rate band is grossed up, and the gross transfer is the net gift plus the tax.
Nil rate band: £325,000 per person, reduced by chargeable transfers in the seven years before the gift; At the time of a CLT, earlier PETs are ignored because they are treated as exempt. If the donor dies within seven years, those PETs become chargeable and use up the nil rate band. That can increase the tax on later CLTs made within seven years after them.

How to solve Lifetime Transfers: PETs, CLTs and Exemptions questions

Use this order for any lifetime transfer question. It works for a single gift and for a series of gifts.

1List every gift in date order. Note the donor, the recipient, the value and whether the recipient is an individual, a trust or a company.
2Exempt anything immediately exempt, such as gifts to a spouse or civil partner or to a charity. Then calculate the transfer of value, and for a part of a holding or a donor-paid tax situation, use the before and after loss.
3Apply the specific exemptions to each gift: marriage first, then small gifts (only if total gifts to that person in the year are £250 or less and no other exemption covers the same gift), and normal expenditure out of income if the facts support it.
4Apply the annual exemption last, to the earliest gift in the tax year first. Use the current year first and then any amount brought forward from the previous year. Do not carry forward more than one year.
5Classify the balance. Gifts to individuals are PETs. Gifts to a relevant property trust or a company are CLTs. Show the PET as having no tax now.
6For a CLT, take the nil rate band of £325,000, deduct chargeable transfers in the seven years before the gift, and tax the excess at 20%. If the donor pays the tax, tax the net excess at 20/80 instead.
7State what happens next: a PET is brought into charge if death occurs within seven years. A CLT may be charged again at 40% after credit for tax already paid, with taper relief. Say whether more tax is due.

Quickest way: Exemptions first, then label PET or CLT

When to use it: Use this when a question gives several gifts across tax years and you have limited time.

Write a column for each tax year with £3,000 annual exemption and any brought forward amount.
Cross out exempt recipients, then deduct marriage and small gifts.
Apply the annual exemption to the earliest gift in the tax year first, after the marriage and other specific exemptions on that gift. Tick off the carry forward.
Label each remaining amount PET or CLT in the margin.
Only compute IHT for CLTs. Do one line of tax: (net chargeable amount − NRB left) × 20% if the trustees pay, or × 20/80 if the donor pays.

Common mistakes in Lifetime Transfers: PETs, CLTs and Exemptions

Using the annual exemption before the marriage exemption on the same gift.
Students think annual exemptions always come first because they apply to every gift.
Fix: Apply the marriage exemption first, then the annual exemption to what remains. The annual exemption is used last.
Carrying forward the annual exemption for more than one year.
Students assume unused exemption accumulates until it is used.
Fix: Carry forward only the unused amount from the previous tax year. Use the current year first, then the brought forward amount.
Treating a gift to a discretionary trust as a PET.
Students see 'a gift' and assume it is to another individual.
Fix: A gift to most trusts and to a company is a CLT. Label the recipient first, then decide the category.
Forgetting to gross up when the donor pays the tax on a CLT.
Students apply 20% directly to the excess, as if the trustees were paying.
Fix: If the donor pays, the tax is 20/80 of the net excess over the available nil rate band. Add the tax to the net gift to get the gross transfer.
Applying the small gifts exemption when it is not available.
Students think £250 can always be taken from any gift.
Fix: The £250 is per recipient per tax year. It cannot be used on a gift already covered by another exemption. If total gifts to that person in the year exceed £250, none of it applies.
Taxing a PET at the time of the gift.
Students confuse a PET with a CLT.
Fix: Show nil tax on a PET at the date of the gift. Only discuss tax if the donor dies within seven years.

Worked examples

Example 1

On 10 June 2025 Asha gave £50,000 cash to her adult daughter. She made no other gifts in 2024/25 or 2025/26, and her 2024/25 annual exemption was unused. Compute the amount of the PET.

Show the solution

The recipient is an individual, so the gift is a PET once exemptions are deducted.
The 10 June 2025 gift falls in 2025/26. Use the 2025/26 annual exemption of £3,000 first.
Then use the 2024/25 exemption brought forward of £3,000.
Total exemptions are £3,000 + £3,000 = £6,000.
Potentially exempt amount: £50,000 − £6,000 = £44,000.

Answer: The PET is £44,000. There is no IHT now. Tax arises only if Asha dies within seven years.

Example 2

Ben, who has made no earlier gifts, settled £400,000 into a discretionary trust in August 2025. The trustees pay any IHT. Assume his annual exemptions for 2025/26 and 2024/25 are available. Compute the lifetime IHT.

Show the solution

A gift to a discretionary trust is a CLT.
Deduct annual exemptions: £3,000 for 2025/26 and £3,000 brought forward from 2024/25, a total of £6,000.
Chargeable amount: £400,000 − £6,000 = £394,000.
The nil rate band is £325,000, with no earlier chargeable transfers in the previous seven years.
Excess over the nil rate band: £394,000 − £325,000 = £69,000.
Trustees pay, so tax is 20% × £69,000 = £13,800.

Answer: The lifetime IHT is £13,800, payable by the trustees. If Ben dies within seven years, more tax may be due at 40% with credit for this tax.

Exam tips

Set out the annual exemption as a two-line table for each tax year. Marks are given for correct carry-forward.
Always state the PET or CLT label and the reason. This is where the professional skills marks for analysis are earned.
Say who pays the tax on a CLT. If it is the donor, show the 20/80 gross-up and the gross transfer.
Read for normal expenditure out of income. Look for regular gifts, a stable pattern and a high income left after living costs.
Take the nil rate band and tax rates from the tax tables ACCA provides. Do not rely on memory.

Practice questions from Inheritance tax: the basic principles of computing transfers of value

Lifetime Transfers: PETs, CLTs and Exemptions in other exams

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

ACCA Applied SkillsPotentially Exempt Transfers and Chargeable Lifetime Transfers

Lifetime Transfers: PETs, CLTs and Exemptions: frequently asked questions

What is the difference between a PET and a CLT?

A PET is a gift by an individual to another individual. It is exempt unless the donor dies within seven years. A CLT is a gift to a relevant property trust or a company. It is taxed straight away at 20% above the nil rate band.

Can I carry forward the IHT annual exemption?

Yes, but only one year. If you did not use your £3,000 exemption last year, you can add it to this year's. Use the current year's exemption first. You cannot carry forward more than one year.

How does the normal expenditure out of income exemption work?

The gift must be part of a regular pattern and be made from income, not capital. The donor must also keep their normal standard of living afterwards. There is no financial limit. Records of income and spending are the key evidence.

How do I compute lifetime IHT on a CLT?

Deduct exemptions to find the chargeable amount. Then deduct the unused nil rate band of £325,000. Tax the excess at 20% if the trustees pay. If the donor pays, tax is 20/80 of the excess.