Advanced Taxation (UK) · Inheritance tax: the liabilities arising on chargeable lifetime transfers and on death

Chargeable Lifetime Transfers and PETs for ACCA Advanced Taxation

Updated 11 October 2026 · Fact-checked

A chargeable lifetime transfer (CLT) is a lifetime gift to a trust, taxed at 20% above the available nil rate band. If the donor pays the tax, gross up the net gift. A PET is a gift to an individual that is only taxed at 40% if the donor dies within seven years.

Understand Chargeable Lifetime Transfers and PETs

Inheritance tax (IHT) applies to a transfer of value. Start with the loss to the donor's estate: the value of the estate before the gift less the value after it. Then apply the annual exemptions and other exemptions. What remains is either a potentially exempt transfer (PET) or a chargeable lifetime transfer (CLT).

A PET is a gift to another individual, or to a bare trust. It has no tax when made. It becomes chargeable only if the donor dies within seven years of the gift. If the donor survives seven years, the PET is fully exempt.

A CLT is mainly a gift to a discretionary trust or a company. Tax is due at once at the lifetime rate of 20%, but only on the amount above the nil rate band. The nil rate band is £325,000. It is used up by chargeable transfers made in the previous seven years. This is called cumulation.

If the donor pays the lifetime tax, the gift is a net gift. The donor's estate falls by the gift plus the tax. So you must gross up the net gift. The excess over the nil rate band is divided by 80% (equivalent to multiplying by 100/80). If the trustees pay the tax, there is no grossing up. Tax is just 20% of the excess.

If the donor dies within seven years of a CLT or PET, the transfer is re-calculated at the death rate of 40%. You use the nil rate band left at the date of the gift, after chargeable transfers in the seven years before that gift. Taper relief reduces the tax, not the value. It applies only if the gift was made more than three years before death. Tax paid in lifetime is credited, but no tax is refunded.

Key rules to remember

Nil rate band: £325,000; Available NRB = £325,000 less chargeable transfers in the 7 years before the gift. Residence nil rate band does not apply to lifetime transfers.
Lifetime rate: 20% on the excess over the available NRB; Use when trustees pay the tax (no grossing up).
Grossing up: Gross transfer = NRB used + (net gift − available NRB) × 100/80; Use when the donor pays the tax. Tax = 20% × (gross − NRB), or 25% of the net amount over the NRB (20/80).
Death rate: 40% on the excess over the available NRB; Applies to PETs and CLTs made within 7 years of death.
Taper relief: Years between gift and death: 3–4: 20%; 4–5: 40%; 5–6: 60%; 6–7: 80% reduction; Reduces the death tax payable. No relief if death is within 3 years.
Cumulation period: 7 years before the date of the gift; Look back from each gift, not from death.

How to solve Chargeable Lifetime Transfers and PETs questions

Work through each gift in date order. Keep a running total of chargeable transfers.

1Calculate the transfer of value: the fall in the donor's estate. Deduct exemptions (annual exemption of the current year and the previous year if unused) in date order.
2Classify the gift. Gift to an individual is a PET. Gift to a trust is normally a CLT.
3For a CLT, list chargeable transfers in the 7 years before the gift. Work out the available NRB.
4Decide who pays the tax. If the donor pays, gross up the part above the NRB (÷ 80%). If the trustees pay, apply 20% to the excess.
5If death occurs within 7 years, re-compute each gift in date order at 40%. Treat PETs as chargeable now. Use the NRB available at the date of each gift.
6Apply taper relief if more than 3 years passed, then deduct lifetime tax paid. Do not refund any excess.
7Use the nil rate band left over for the death estate. Chargeable gifts in the 7 years before death use it up first.
8State who pays: trustees or donee for the gifts, the personal representatives for the estate.

Quickest way: Table method for a gift sequence

When to use it: Use when a question has several gifts and a death within 7 years.

Set up columns: date, gift, gross chargeable amount, NRB used, tax.
Fill the gross chargeable amounts first, in date order.
Cross off any transfers older than 7 years from each new gift.
Compute lifetime tax, then death tax, then taper, using the same table.
Put the NRB remaining at death into the estate calculation.

Common mistakes in Chargeable Lifetime Transfers and PETs

Forgetting to gross up when the donor pays the lifetime tax.
The question says only 'gift' and students assume the net figure is the transfer.
Fix: Assume the donor pays unless told the trustees pay. Divide the excess by 80%.
Grossing up the whole gift rather than only the part above the NRB.
Students apply the 100/80 factor mechanically to the net gift.
Fix: Deduct the available NRB first. Gross up only the remainder, then add the NRB back.
Cumulating from the date of death rather than from the date of each gift.
Students confuse the two seven-year periods.
Fix: For each gift, look back seven years from that gift date. Separately, check whether death was within seven years of the gift.
Applying taper relief to the value of the gift.
Students think the gift is reduced.
Fix: Taper reduces the tax payable only. The full value still uses up the NRB. No taper is available for death within 3 years.
Treating a PET as taxable in lifetime or using the residence nil rate band.
Students mix lifetime and death rules.
Fix: A PET has no tax when made. The residence nil rate band applies only to the death estate, not to lifetime transfers.
Refunding lifetime tax when the death tax is lower.
Students subtract tax paid and show a negative figure.
Fix: Death tax is the higher of nil and the recomputed tax less lifetime tax paid. No refund is given.

Worked examples

Example 1

On 10 June 2024, Priya settled £400,000 on a discretionary trust, after annual exemptions. She had made no earlier transfers. Priya paid the tax. Calculate the lifetime IHT.

Show the solution

Classification: gift to a discretionary trust is a CLT.
Available NRB is £325,000 (no transfers in the previous 7 years).
Net gift above NRB: £400,000 − £325,000 = £75,000.
Gross up: £75,000 × 100/80 = £93,750.
Tax = 20% × £93,750 = £18,750.
Check: gross transfer = £325,000 + £93,750 = £418,750. Net gift £400,000 + tax £18,750 = £418,750.

Answer: Lifetime IHT payable is £18,750. The gross chargeable transfer is £418,750.

Example 2

Using the facts above, Priya made a PET of £100,000 (after exemptions) on 1 December 2025. She died on 20 January 2028. She had made no other gifts. Calculate the extra IHT due on the CLT and the IHT due on the PET.

Show the solution

Death is within 7 years of both gifts, so both are recomputed at the death rate of 40%, in date order.
CLT of 10 June 2024: gross value £418,750 (the figure used for the lifetime tax). No transfers in the 7 years before it, so the NRB available is £325,000.
Excess over NRB: £418,750 − £325,000 = £93,750. Tax at 40% = £37,500.
Taper relief: death on 20 January 2028 is 3 years 7 months after 10 June 2024, so it falls in the 3–4 year band and a 20% reduction applies.
Tax after taper: £37,500 × 80% = £30,000. Less lifetime tax paid £18,750. Additional tax on the CLT: £11,250.
PET of 1 December 2025: death on 20 January 2028 is 2 years 1 month later, which is less than 3 years, so no taper relief.
NRB available for the PET: the chargeable transfer in the 7 years before it is the CLT of £418,750. This exceeds the £325,000 NRB, so the NRB is fully used and none is available.
Tax on the PET = 40% × £100,000 = £40,000.

Answer: Additional IHT on the CLT is £11,250, payable by the trustees. IHT on the PET is £40,000, payable by the donee.

Exam tips

Write the gift date and calculate the seven-year look-back for every transfer. Examiners award marks for this explicit step.
State your assumption on who pays the lifetime tax. If unstated, assume the donor pays and gross up.
Use the exam's tax tables for the NRB, 20% and 40% rates and the taper table. Do not rely on memory.
Show the NRB left over for the estate. Many marks are lost by ignoring the lifetime gifts in the estate computation.
In planning requirements, explain the advice: PETs avoid lifetime tax, but are exposed to death tax if the donor dies within seven years.

Practice questions from Inheritance tax: the liabilities arising on chargeable lifetime transfers and on death

Chargeable Lifetime Transfers and PETs 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 SkillsChargeable Lifetime Transfers and Lifetime IHT Calculation

Chargeable Lifetime Transfers and PETs: frequently asked questions

How do I gross up a lifetime transfer?

Deduct the available nil rate band from the net gift. Divide the excess by 80%, or multiply by 100/80. Tax is 20% of that grossed-up excess, which is the same as 25% of the net excess.

When does a PET become chargeable?

A PET becomes chargeable if the donor dies within seven years of making it. Tax is then calculated at the death rate of 40% on any value above the nil rate band that remains. Taper relief may reduce the tax if death is more than three years after the gift.

Does taper relief reduce the value of the gift?

No. Taper relief reduces only the tax payable. The full value of the gift still uses up the nil rate band for later transfers and for the estate.

Is the nil rate band reset after seven years?

Yes, in effect. Only chargeable transfers made in the seven years before a gift reduce the NRB available for it. Older transfers drop out of the cumulation.