What is a potentially exempt transfer and how does the 7-year rule work?

Full answer

A PET is a lifetime gift to an individual (not most trusts) that carries no immediate IHT charge. It is initially exempt only in potential: survive seven years from the date of the gift and it leaves your estate entirely. Die within seven years and it becomes chargeable and is brought back into the IHT calculation. Mechanism: failed PETs use up your nil-rate band first, in date order. The standard nil-rate band is GBP 325,000 for 2026/27, with a residence nil-rate band of up to GBP 175,000 where a home passes to direct descendants. Only the portion of failed gifts above the available nil-rate band is taxed at 40%, and it is on that taxed excess that taper relief reduces the bill. Taper does not reduce the value brought into the estate - a common misunderstanding. Worked example: someone gives GBP 400,000 and dies five years later with no other lifetime gifts. The first GBP 325,000 is covered by the nil-rate band; GBP 75,000 is chargeable at 40% (GBP 30,000), and taper relief for surviving three to four years (this example surviving five) reduces that. Had they survived seven years, the whole GBP 400,000 would have escaped IHT. Who it affects: anyone making substantial lifetime gifts to family. Smaller gifts may already be exempt under separate allowances such as the annual exemption, small gifts, and normal-expenditure-out-of-income rules, which sit outside the seven-year clock. 2026/27 detail: nil-rate bands remain GBP 325,000 and GBP 175,000, and the death rate is 40% (36% where 10% or more of the estate goes to charity). Keep dated records of every gift. Use an inheritance tax calculator to model how gifts and the seven-year timeline affect a potential estate bill.

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