Advanced Taxation (UK) · Inheritance tax: the scope of inheritance tax

Exempt, Potentially Exempt and Chargeable Transfers in Inheritance Tax

Updated 11 October 2026

A lifetime gift is first tested for an exemption. If none applies, a gift to an individual is a potentially exempt transfer (PET), which is only taxed if the donor dies within seven years. Most other gifts, such as those into a trust, are chargeable lifetime transfers (CLTs), taxable at 20% above the nil rate band.

Understand Exempt, Potentially Exempt and Chargeable Transfers

Inheritance tax (IHT) applies to a transfer of value: a gift that reduces the donor's estate. The loss to the donor's estate is measured, not the gain to the recipient. Every lifetime transfer falls into one of three groups. You must decide which group first, because it drives everything else.

Exempt transfers are outside IHT altogether. Examples are transfers between spouses or civil partners, gifts to UK charities, the annual exemption, small gifts, normal expenditure out of income and gifts in consideration of marriage. They never become taxable later, even if the donor dies the next day. Be careful with the spouse exemption: the limit that applies where the donor is UK domiciled and the recipient spouse is not is not given in the tax tables, so use the figure given in the question.

Potentially exempt transfers (PETs) are lifetime gifts to another individual, or into a disabled person's trust, that are not otherwise exempt. A PET is treated as exempt when made. No tax is due at the time. If the donor survives seven years, it stays exempt for ever. If the donor dies within seven years, the PET becomes chargeable and is taxed at death rates.

Chargeable lifetime transfers (CLTs) are lifetime gifts that are not exempt and not PETs. The usual example is a gift into a trust (a relevant property trust), and a gift to a company is also a CLT. A CLT is tested against the nil rate band straight away. The excess is taxed at the lifetime rate of 20%. If the donor dies within seven years, extra tax may be due at the death rate of 40%, with credit for lifetime tax paid and with taper relief where it applies.

The working order is simple. Apply exemptions to the gift. Classify what is left as a PET or a CLT. Then deal with the tax: nothing now for a PET, and the nil rate band and 20% for a CLT. The death-within-seven-years calculation comes after that.

Key rules to remember

Classification of a lifetime gift: Exempt (if an exemption applies) → otherwise PET (to an individual or disabled trust) → otherwise CLT (e.g. into a relevant property trust or to a company); Always apply the exemptions before classifying. Only the part of a gift not covered by exemptions is a PET or CLT.
Transfer of value: Transfer of value = Value of donor's estate before gift − Value of donor's estate after gift; This is the loss to the donor. Include any IHT the donor pays on the gift, which means grossing up where the donor bears the tax.
Nil rate band and rates: Nil rate band £325,000; lifetime rate 20%; death rate 40%; Take these from the tax tables. The lifetime rate applies to the excess over the nil rate band on CLTs.
Seven-year rule: Death within 7 years of the gift: PET becomes chargeable; CLT may attract extra tax at 40% (less lifetime tax paid); Survive seven years and a PET is fully exempt. If the donor survives seven years, no additional tax arises on a CLT, but the CLT stays in the seven-year cumulation for later transfers made within seven years of it.
Taper relief percentages: 3–4 years 20%; 4–5 years 40%; 5–6 years 60%; 6–7 years 80% reduction in the tax; The reduction applies to the tax, not to the value of the gift. It only helps where the gift exceeds the available nil rate band. No relief applies if death is within 3 years.
Seven-year cumulation: Nil rate band available = £325,000 − chargeable transfers in the 7 years before the gift; Only chargeable transfers count, plus PETs that have become chargeable on death.

How to solve Exempt, Potentially Exempt and Chargeable Transfers questions

Use this order for any question that asks you to classify lifetime gifts or explain their IHT treatment.

1List each gift with its date, recipient and value. Identify the donor's domicile and relationship to the recipient.
2Test for exemptions: spouse or civil partner, charity, marriage gift, small gifts, normal expenditure out of income. Take the annual exemption (use the amount given in the question or tables) from the current year, then the previous year if unused. Use the exemptions in date order.
3Classify what remains. A gift to an individual is a PET. A gift into a trust that is not a disabled person's trust, or to a company, is a CLT.
4For a PET, say that there is no tax now and that it is only taxable if the donor dies within seven years.
5For a CLT, start with the net transfer, which is the transfer of value after exemptions. Add the previous seven years of chargeable transfers and find the nil rate band still available out of £325,000. The tax depends on who pays it. - If the trustees pay the tax, the net transfer is the gross transfer. Tax = 20% × (net transfer − available nil rate band), if positive. - If the donor pays the tax, only the excess is grossed up. The part of the net transfer within the available nil rate band is not grossed up. Tax = net excess × 20/80, which is an effective 25% of the net excess. Gross transfer = net transfer + tax. The tax is not charged again on itself. The gross transfer is the figure that goes into the seven-year cumulation.
6If death occurs, restate each PET as chargeable, in date order. Work out the nil rate band available, charge at 40%, apply taper relief and deduct lifetime tax paid.
7Write a short conclusion that answers the requirement and mention any planning point, such as surviving seven years.

Quickest way: Three-box sort

When to use it: Use this when the question asks you to identify the IHT status of several gifts quickly.

Draw three columns: Exempt, PET, CLT.
Put spouse, charity and marriage gifts in Exempt after checking limits.
Put gifts to individuals in PET and gifts into trusts or to companies in CLT.
Deduct annual exemptions from the first gifts in date order, then write one line on tax for each box.

Common mistakes in Exempt, Potentially Exempt and Chargeable Transfers

Treating a gift into a trust as a PET.
Students think any lifetime gift to a person is a PET and forget the trust is the recipient.
Fix: Ask who receives the gift. A trust (other than a disabled person's trust) makes it a CLT. Tax is tested immediately.
Charging IHT on a PET at the time of the gift.
Students mix up PETs and CLTs.
Fix: State that no tax arises on a PET unless death occurs within seven years. Then compute tax only if the question says the donor died.
Applying taper relief to the value of the gift.
The word 'taper' suggests the gift shrinks.
Fix: Taper relief cuts the tax payable. The gift value stays the same for cumulation, which affects later transfers.
Using the annual exemption against a PET or CLT in the wrong order, or forgetting the previous year's unused amount.
Students apply the exemption to the largest gift or ignore carry forward.
Fix: Deduct exemptions from gifts in date order. Use the current year first and then any unused amount from the previous year.
Forgetting the seven-year cumulation when finding the nil rate band for a CLT.
Students use the full £325,000 every time.
Fix: Add up chargeable transfers in the seven years before the gift. Only the remaining nil rate band is available.
Calling a gift to a spouse exempt without checking domicile.
The rule is learnt as 'spouse exempt, no limit'.
Fix: The exemption is unlimited where the recipient spouse is UK domiciled (whatever the donor's domicile), or where both are non-UK domiciled. It is limited only where the donor is UK domiciled and the recipient spouse is not; use the limit given in the question.

Worked examples

Example 1

On 10 June 2024 Priya, who is UK domiciled, gave £60,000 cash to her daughter and £40,000 to a discretionary trust on 1 March 2025. She made no earlier gifts. Assume the annual exemption is £3,000 and use the previous year's unused exemption where relevant. Classify each gift and state the immediate IHT.

Show the solution

The gift to her daughter on 10 June 2024 is to an individual, so after exemptions it is a PET.
Exemptions are applied in date order, so the first gift on 10 June 2024 gets them first. This gift falls in the 2024/25 tax year (6 April 2024 to 5 April 2025). The 2024/25 annual exemption of £3,000 is used first. PET = £60,000 − £3,000 = £57,000.
Priya made no earlier gifts, so her 2023/24 annual exemption of £3,000 is unused. An unused annual exemption can be carried forward for one year only, to 2024/25. It is used only after the 2024/25 exemption has been used. Here it is also set against the PET. PET = £57,000 − £3,000 = £54,000.
The gift to the trust on 1 March 2025 also falls in the 2024/25 tax year, because it is before 6 April 2025. Both exemptions available to 2024/25 (the current year's and the 2023/24 carry-forward) were already used on the earlier PET. No exemption is left, so the CLT is £40,000.
The £40,000 CLT falls within the £325,000 nil rate band (no earlier chargeable transfers; the PET is ignored for now). Tax at 20% on a nil excess = £0.

Answer: The gift to the daughter is a PET of £54,000 after £6,000 of exemptions, with no tax now. The trust gift is a £40,000 CLT with no lifetime IHT because it is covered by the nil rate band.

Example 2

Sam made a CLT of £400,000 into a discretionary trust on 1 August 2020. He made no earlier transfers. The trustees paid the lifetime tax. Sam died on 1 February 2025. Calculate the additional IHT on death, ignoring annual exemptions and the estate. Use a nil rate band of £325,000 at all dates.

Show the solution

Lifetime tax: £400,000 − £325,000 = £75,000 excess × 20% = £15,000, paid by the trustees.
Death is more than 4 but less than 5 years after the gift (1 August 2020 to 1 February 2025 is 4 years 6 months), so taper relief is 40%.
Tax at death rates: £75,000 × 40% = £30,000.
Taper relief: £30,000 × 40% = £12,000 reduction. Tax after taper = £30,000 − £12,000 = £18,000.
Deduct lifetime tax paid of £15,000. Additional tax = £18,000 − £15,000 = £3,000.
Taper relief can reduce the death tax below the lifetime tax paid, but no refund of lifetime tax is given. The additional tax is the greater of nil and (death tax after taper − lifetime tax paid). Here that is £3,000.

Answer: Additional IHT on death is £3,000.

Exam tips

Write the classification (exempt, PET or CLT) in your first line for each gift. Markers reward clear labelling.
Show the date order for exemptions. Many marks are lost by using the annual exemption on the wrong gift.
State both outcomes for a PET: nothing now and the position if the donor dies within seven years.
Use the nil rate band, rates and taper percentages from the tax tables. Do not rely on memory for the bands.
If the question names a trust, check whether it is a relevant property trust or a disabled person's trust before you classify.

Practice questions from Inheritance tax: the scope of inheritance tax

Exempt, Potentially Exempt and Chargeable Transfers: frequently asked questions

What is the difference between a PET and a chargeable lifetime transfer?

A PET is a gift to an individual that is treated as exempt unless the donor dies within seven years. A CLT is typically a gift into a trust and is tested against the nil rate band at once, with 20% tax on any excess. Both can lead to extra tax if the donor dies within seven years.

How does the seven-year rule work?

If the donor survives seven years after a PET, it is wholly exempt. If death occurs within seven years, the PET becomes chargeable and is taxed at 40% on any excess over the available nil rate band. Taper relief reduces the tax for deaths more than three years after the gift.

Which gifts are always exempt?

Gifts between spouses or civil partners, and gifts to UK charities, are exempt, subject to the domicile condition for spouses. The annual exemption, small gifts, gifts in consideration of marriage and normal expenditure out of income are also exempt, within their limits. Use the amounts shown in the question or tax tables.

Does taper relief reduce the value of a PET?

No. Taper relief reduces the tax payable on a gift made between three and seven years before death. The value of the gift is unchanged when working out the nil rate band for later transfers.