Answers · UK 2025/26
What is a Potentially Exempt Transfer for Inheritance Tax?
A Potentially Exempt Transfer (PET) is a lifetime gift to another individual that becomes completely free of Inheritance Tax if you survive seven years from the date of the gift. If you die within seven years, the gift is brought back into your estate for IHT purposes, though taper relief can reduce the tax due on gifts made between three and seven years before death.
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Potentially Exempt Transfers are the standard mechanism most lifetime gifting relies on for Inheritance Tax planning, and understanding exactly how the seven-year rule and its consequences work is essential for anyone thinking about giving away assets during their lifetime. **What qualifies as a PET** A PET is a gift made by an individual, directly to another individual (not to most types of trust, and not to most companies), during their lifetime -- common examples include cash gifts to children or grandchildren, transferring shares or property to a family member, or gifting other valuable assets. Gifts INTO most trusts are instead usually treated as "chargeable lifetime transfers" with different, immediate tax consequences, rather than PETs. **"Potentially" exempt -- the seven-year condition** The gift is only "potentially" exempt at the time it's made -- it doesn't become FULLY exempt from Inheritance Tax until the person making the gift survives a full seven years from the date of the gift. If they die within those seven years, the gift is brought back ("clawed back") into the calculation of their estate for Inheritance Tax purposes, as though it hadn't fully left their estate. **What happens if you die within seven years** If death occurs within seven years, the PET uses up some or all of the deceased's available nil rate band (£325,000) first, in the order the gifts were made (earliest gifts first) -- if the total value of PETs made in the seven years before death exceeds the available nil rate band, tax becomes due on the excess at up to 40%, though taper relief can reduce the RATE of tax (not the value of the gift itself) if death occurs more than three years after the gift. **Who is actually liable for the tax** Where tax becomes due on a failed PET, the recipient of the gift is primarily liable to pay the tax (not the deceased's estate, though the estate can pay it if the recipient cannot or the executors agree to settle it from estate funds) -- this is an important and sometimes overlooked practical point, since a gift recipient could unexpectedly find themselves facing a tax bill years after receiving a gift, if the donor dies within seven years. **PETs and the nil rate band interact with your estate too** Because failed PETs use up the nil rate band before the rest of the estate does, a large lifetime gift that fails (due to death within seven years) can effectively reduce or eliminate the nil rate band otherwise available to shelter the REST of the estate from Inheritance Tax, increasing the overall tax bill beyond just the tax on the gift itself. **Exempt gifts that are never PETs at all** Some gifts are fully exempt from the outset and never become PETs in the first place, regardless of survival -- for example, gifts between UK-domiciled spouses or civil partners, small gifts up to £250 per person per year, the annual £3,000 gift exemption, normal gifts out of surplus income (a valuable and often underused exemption for regular gifts that don't affect your standard of living), and wedding/civil partnership gifts up to set limits depending on your relationship to the couple. **Record-keeping matters enormously** Because PETs only become relevant for tax purposes if the donor dies within seven years, and because working out the correct IHT position can require reconstructing a gift history going back up to seven years (or longer, given the interaction with the nil rate band), keeping clear records of the date, value, and recipient of significant lifetime gifts is essential for whoever eventually administers the estate. **Practical tip** If you're making a substantial gift as part of Inheritance Tax planning, consider taking out a reducing term life insurance policy (a "gift inter vivos" policy) specifically designed to cover the potential IHT liability if you die within the seven-year window, giving the recipient the funds to pay any tax due without needing to sell the gifted asset itself.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.