What is a chargeable lifetime transfer and how is it taxed?

Full answer

A chargeable lifetime transfer (CLT) is a gift you make during your lifetime into most types of trust (typically a discretionary or relevant property trust). It contrasts with a potentially exempt transfer (PET) -- an outright gift to an individual -- which only becomes taxable if you die within seven years. A CLT, by contrast, can trigger Inheritance Tax (IHT) straight away. How it is taxed: you add up the chargeable value of the gift and set it against your available nil-rate band (NRB), which is GBP 325,000 for 2026/27, reduced by any other CLTs in the previous seven years. Anything above the available band is charged immediately at the lifetime rate of 20%. If the trustees pay the tax it is 20% of the excess; if you (the settlor) pay it, the gift is effectively grossed up so the effective rate is 25%, because the tax itself is also a transfer of value. Worked example: you settle GBP 425,000 into a discretionary trust and have your full GBP 325,000 NRB available. The excess is GBP 100,000. If the trustees pay, the immediate charge is 20% x GBP 100,000 = GBP 20,000. If you pay it personally, the grossed-up charge is 25% x GBP 100,000 = GBP 25,000. Death within seven years: the CLT is reassessed at the death rate (up to 40%), with taper relief potentially reducing the charge for gifts made three to seven years before death, and credit given for the 20% already paid. Trusts also face their own periodic (10-yearly) and exit charges. Who it affects: anyone using trusts for estate planning. The numbers can be intricate, so model your estate with an inheritance tax calculator and take specialist advice -- trust taxation is one of the most complex parts of IHT.

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