Comparison · 2026/27
Potentially Exempt Transfer vs Chargeable Lifetime Transfer
Not all lifetime gifts are treated the same way for Inheritance Tax. Gifts to individuals are usually Potentially Exempt Transfers (PETs), taxed only if you die within seven years. Gifts into most trusts are Chargeable Lifetime Transfers (CLTs), which can trigger an immediate 20% charge. This guide explains how each is taxed.
At a Glance
| Feature | PET | CLT |
|---|---|---|
| Typical gift | Cash/property to an individual | Gift into most trusts |
| Immediate tax | None | 20% above cumulative £325,000 NRB |
| If donor survives 7 years | Fully exempt | Fully exempt (excl. lifetime charge already paid) |
| If donor dies within 7 years | Added back at up to 40%, taper relief on tax after 3 yrs | Reassessed at death rates, credit for lifetime tax paid |
| Ongoing trust charges | N/A | 10-yearly periodic charge, exit charges |
| Donor control after gift | None — outright gift | Can retain influence as settlor/trustee |
Figures shown reflect the 2026/27 nil rate band of £325,000. Confirm current rates and thresholds on gov.uk before relying on them for planning.
How Potentially Exempt Transfers Work
A PET is the default treatment for a lifetime gift made directly to another individual, or into a bare trust for their absolute benefit. No Inheritance Tax is due at the time of the gift, however large the amount. The gift only becomes relevant for tax purposes if the donor dies within seven years, at which point it is added back into the estate calculation.
If death occurs within the seven-year window, taper relief can reduce the rate of tax charged on the gift once at least three years have passed since it was made — but taper relief never reduces the value of the gift counted towards using up the nil rate band, only the tax rate applied once that band is exceeded.
How Chargeable Lifetime Transfers Work
A CLT typically arises when a gift is made into most types of trust — commonly a discretionary trust. Unlike a PET, a CLT is assessed for tax immediately: if the cumulative value of CLTs made by the donor in the previous seven years exceeds the £325,000 nil rate band, an immediate lifetime charge of 20% applies to the excess (or an effective 25% if the trust does not bear its own tax and the gift is grossed up).
Trusts holding assets from a CLT also face ongoing Inheritance Tax charges — a periodic charge of up to 6% on value above the available nil rate band every ten years, and exit charges when capital leaves the trust. If the donor dies within seven years of the CLT, it is reassessed at death rates with credit given for any lifetime tax already paid.