Advanced Taxation (UK) · Inheritance tax: the use of exemptions and reliefs in deferring and minimising inheritance tax liabilities

Inheritance Tax Lifetime Transfers: PETs, CLTs and Exemptions

Updated 11 October 2026 · Fact-checked

A lifetime gift is first reduced by exemptions. What is left is a PET if made to an individual (or a bare trust), and a CLT if made to most trusts or a company. PETs are taxed only if the donor dies within seven years. CLTs are taxed at 20% above the nil rate band when made.

Understand Lifetime Transfers: PETs, CLTs and Annual Exemptions

Inheritance tax (IHT) charges a transfer of value. That is a fall in the value of the donor's estate caused by a gift. You measure the loss to the donor, not the gain to the recipient. This matters when the gift is of something like a shareholding that is worth more as a whole than the part given away.

First deduct the exemptions. Spouse and charity gifts are fully exempt. The other lifetime exemptions are the annual exemption, small gifts, marriage gifts and normal expenditure out of income. Whatever remains is then classified.

A potentially exempt transfer (PET) is a gift to another individual, or to a bare trust. It has no tax at the time of the gift. It becomes exempt if the donor survives seven years. If the donor dies within seven years, it becomes chargeable and is taxed at death rates using the nil rate band available then.

A chargeable lifetime transfer (CLT) is mainly a gift into a trust, such as a discretionary trust, or to a company. It is taxed at once at the 20% lifetime rate on the amount above the available nil rate band. If the donor dies within seven years, the CLT is re-taxed at 40% with credit for lifetime tax paid. Taper relief can reduce the death tax, but it never gives a refund of lifetime tax.

The nil rate band is £325,000. It is used by chargeable transfers in the previous seven years, so you must look back seven years from each CLT. Lifetime tax is 20% of the excess. If the donor pays the tax, the gift is a net gift and must be grossed up: gross = net ÷ 0.8 for the excess over the nil rate band.

Key rules to remember

Nil rate band: £325,000; Reduced by chargeable transfers in the seven years before the transfer. Residence nil rate band (£175,000) is for death estates, not lifetime gifts.
Lifetime IHT rate on a CLT: 20% × (CLT after exemptions − available nil rate band); Applies to the excess only. If the donee pays the tax, no gross-up is needed.
Gross-up where donor pays lifetime tax: Gross transfer = net amount in excess of nil rate band ÷ 0.8; Only the part above the available nil rate band is grossed up. Cash given plus tax paid by donor is the transfer of value.
Death rate: 40% × (chargeable amount − available nil rate band); Applies to PETs and CLTs made within seven years before death. Tax on a CLT is reduced by lifetime tax paid, but not below zero.
Taper relief: 3–4 years: 20%; 4–5: 40%; 5–6: 60%; 6–7: 80% reduction in tax; Reduces the tax, not the value. Gifts made less than 3 years before death get no relief. It only helps where the gift exceeds the nil rate band.
Annual exemption: £3,000 per tax year, plus unused amount from the previous year only; Use the current year's first, then the brought-forward amount. Apply to the earliest gift in the year first.
Small gifts exemption: £250 per donee per tax year; Not available if the donee also receives a gift covered by another exemption such as the annual exemption. It cannot be used to top up a larger gift.
Marriage gift exemption: Parent £5,000; grandparent or remoter ancestor, or bride or groom to the other, £2,500; anyone else £1,000; Gift must be made on or shortly before the marriage and depends on it.
Normal expenditure out of income: Exempt if regular, from income, and leaves the donor with enough income to maintain usual standard of living; No monetary limit. Keep evidence of a pattern of gifts.

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

Work through each gift in date order. The order matters because exemptions, the nil rate band and the seven-year look-back all depend on dates.

1List every gift in date order with its tax year (6 April to 5 April), donee and type of donee.
2Calculate the transfer of value as the loss to the donor's estate, after any fall-in-value or related property effects.
3Deduct exemptions in the right order: spouse or charity first, then marriage gifts, then the annual exemption (current year first, then the previous year's unused amount), and small gifts only where no other exemption has been given to that donee. Check normal expenditure out of income.
4Classify what remains as a PET (gift to an individual) or a CLT (gift to a trust or company).
5For each CLT, find chargeable transfers in the previous seven years, work out the available nil rate band, and compute lifetime tax at 20%. Gross up if the donor pays.
6If the donor dies, re-compute in date order. PETs that fail become chargeable, using the nil rate band after earlier transfers in the seven years before that gift. Apply 40%, then taper relief by years between gift and death, then deduct lifetime tax paid on CLTs.
7Compute tax on the death estate last, using any nil rate band left after gifts in the seven years before death, and state who pays each tax.

Quickest way: Date-ordered running table

When to use it: Use this for any question with several gifts and a death within seven years.

Draw a table with columns: date, gift, exemptions, PET or CLT, gross chargeable amount, and nil rate band used.
Fill the exemptions before anything else. Write the annual exemption position by tax year so you do not use it twice.
Mark each PET as no tax now. Calculate tax only on CLTs.
If there is a death, add a second set of columns: years to death, taper percentage, death tax, less lifetime tax, tax payable.
Check the total nil rate band used never exceeds £325,000 in any seven-year window.

Common mistakes in Lifetime Transfers: PETs, CLTs and Annual Exemptions

Taxing a PET at the time of the gift.
Students treat every gift as chargeable and forget the PET label.
Fix: Ask who receives the gift. An individual means a PET, so say no tax is due unless the donor dies within seven years.
Applying taper relief to the value of the gift instead of the tax.
The table says 'percentage reduction' without saying what is reduced.
Fix: Compute death tax first, then reduce that tax by the taper percentage. Gifts within the nil rate band have no tax to reduce.
Using the annual exemption twice or in the wrong order.
Students forget the carry forward is only for one year and only after the current year is used.
Fix: Set out the exemption by tax year. Use the current £3,000 first, then the previous year's unused amount. Allocate to the earliest gift in the year first.
Forgetting to gross up when the donor pays the lifetime tax on a CLT.
The gift looks like a round amount of cash, so students tax it as stated.
Fix: Check who bears the tax. If the donor, gross up the part above the nil rate band by dividing by 0.8.
Using the full £325,000 nil rate band without looking back seven years.
Students ignore earlier CLTs, or include PETs that have not failed.
Fix: Only earlier chargeable transfers use up the band. In a lifetime computation, PETs are not counted. At death, failed PETs are counted.
Giving refunds when taper relief exceeds lifetime tax, or ignoring that death tax can be nil.
Students subtract lifetime tax from a tapered figure and carry on with a negative number.
Fix: Additional tax on death = tapered death tax less lifetime tax paid, but not below nil. No refund of lifetime tax is given.

Worked examples

Example 1

On 10 August 2024 Dina gave £60,000 cash to her daughter. She made no other gifts in 2023/24 or 2024/25 and had made no chargeable transfers before. State the transfer's IHT treatment and the position if Dina dies in March 2029. Her death estate uses no nil rate band beyond the gift.

Show the solution

The gift is to an individual, so it is a PET. The date falls in 2024/25.
Exemptions: annual exemption for 2024/25 £3,000 plus unused 2023/24 £3,000 = £6,000. Chargeable amount of PET = £60,000 − £6,000 = £54,000.
At the time of the gift no tax is due.
Dina dies in March 2029, about 4 years 7 months later, so within seven years. The PET becomes chargeable.
The nil rate band is £325,000 and no earlier chargeable transfers exist. The £54,000 falls fully within the band.
Death tax = nil. Taper relief is irrelevant because there is no tax to reduce.

Answer: The gift is a PET with a chargeable value of £54,000 after £6,000 of annual exemptions. No tax is due when it is made. If Dina dies within seven years, it is chargeable but covered by the £325,000 nil rate band, so the tax is nil. Taper relief is irrelevant as there is no tax to reduce. The gift will, however, use £54,000 of the band against her death estate.

Example 2

On 1 June 2020 Sam gave £400,000 to a discretionary trust, and the trustees paid any IHT. He had made no earlier transfers. All of his annual exemptions for 2019/20 and 2020/21 had already been used on other gifts, so no exemptions are available against this gift. Calculate the lifetime IHT. Sam dies on 15 May 2025. Calculate the additional IHT on death on the gift, ignoring the effect of the death estate.

Show the solution

A gift to a discretionary trust is a CLT. No exemptions are available against it, so the gross CLT is £400,000.
Available nil rate band is £325,000 as there are no earlier chargeable transfers.
Lifetime tax = 20% × (£400,000 − £325,000) = 20% × £75,000 = £15,000, paid by the trustees, so no gross-up.
Sam dies on 15 May 2025. The gap from 1 June 2020 is 4 years 11 months, so it is more than 4 but less than 5 years. Taper relief is 40%.
The nil rate band at death is £325,000 since no earlier chargeable transfers fall in the seven years before the CLT.
Death tax before taper = 40% × £75,000 = £30,000.
After taper = £30,000 × (100% − 40%) = £30,000 × 60% = £18,000.
Less lifetime tax paid £15,000 = £3,000 additional tax.

Answer: Lifetime IHT is £15,000. On Sam's death within the seven years, the tax on the CLT is £18,000 after 40% taper relief. After credit for £15,000 already paid, the additional IHT payable is £3,000, paid by the trustees.

Exam tips

Show the classification (PET or CLT) for each gift in a clear line. Marks are often earned for the label, even when later numbers are wrong.
Write the tax year next to each gift. Annual exemption marks depend on the 6 April to 5 April boundary, and many questions put gifts either side of it.
Look for planning requirements. Typical advice is to use the annual exemption and carry-forward, make regular gifts out of surplus income and keep records, and make PETs early to start the seven-year clock.
Always read who pays the tax. It decides whether you gross up a CLT.
Take the nil rate band and taper table from the tax tables provided. Remember the tables show only the percentages, so state what they reduce.

Practice questions from Inheritance tax: the use of exemptions and reliefs in deferring and minimising inheritance tax liabilities

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

What is the difference between a PET and a CLT?

A PET is a gift to an individual (or a bare trust). It is tax free when made and exempt if the donor survives seven years. A CLT is a gift to most trusts or a company. It is taxed at 20% above the nil rate band when made and can face further tax if the donor dies within seven years.

Can I carry forward the annual exemption?

Yes, but only for one year. Any unused part of the previous year's £3,000 can be added to the current year, and only after you have used the current year's £3,000. Anything not used by the end of that following year is lost.

When does taper relief apply?

Taper relief applies to tax on a failed PET or on a CLT when the donor dies at least three years after the gift but within seven years. It reduces the tax payable, not the value of the gift. It helps only where the gift exceeds the available nil rate band.

How does normal expenditure out of income work?

A gift is exempt with no limit if it is part of a regular pattern, is paid out of income rather than capital, and leaves the donor able to keep their usual standard of living from income. Evidence of the pattern and of surplus income is what supports the claim.

Is the residence nil rate band available on lifetime gifts?

No. The £175,000 residence nil rate band relates to a home left to direct descendants on death. It does not reduce lifetime tax on a CLT, and the tax tables list the £325,000 nil rate band for lifetime calculations.