Chargeable Lifetime Transfers (CLTs): IHT on Discretionary Trust Gifts UK

A chargeable lifetime transfer is a gift that triggers an immediate inheritance tax charge — most commonly when you transfer assets into a discretionary trust. Unlike a gift to an individual (a potentially exempt transfer), a CLT may generate a tax bill on the day it is made. This guide explains how CLTs work, how much IHT is due, the 7-year cumulation rules, and the ongoing charges that apply inside the trust.

CLTs vs Potentially Exempt Transfers

Inheritance tax divides lifetime gifts into two categories. A potentially exempt transfer (PET) is a gift to another individual — it is treated as exempt at the time and only becomes chargeable if the donor dies within 7 years. A chargeable lifetime transfer (CLT) is different: it is immediately chargeable to IHT and may attract a tax bill regardless of how long the donor lives.

The most common CLTs are transfers into discretionary trusts. Transfers into most other trusts created on or after 22 March 2006 (following the Finance Act 2006 reforms) are also CLTs — including transfers into interest in possession trusts and accumulation trusts.

By contrast, gifts to bare trusts and disabled persons' trusts retain PET treatment.

How IHT Is Calculated on a CLT

IHT on a CLT is charged at the lifetime rate of 20% — half the death rate. The charge applies only to the amount of the CLT that exceeds the donor's available nil-rate band (£325,000 for 2024–2026, frozen until at least 2030).

The nil-rate band is eaten into by any CLTs and failed PETs made in the 7 years before the current CLT. Transfers made more than 7 years ago drop out of account.

There are two ways the IHT may be paid:

Trust pays the IHT: 20% of the excess above the available nil-rate band
Donor pays the IHT: the gift must be grossed up — the IHT payment is itself treated as an additional transfer, raising the effective rate to 25% of the net amount transferred

See our guide to grossing up inheritance tax for worked examples.

The 7-Year Cumulation Rule

Each new CLT uses up the nil-rate band from the oldest transfers first. Once a CLT reaches its 7th anniversary, it drops out of the cumulation window and frees up nil-rate band for future transfers.

This means the most tax-efficient strategy is to spread CLTs so that each one falls within the available nil-rate band — keeping the lifetime IHT charge at zero — and then wait 7 years before making the next. This is sometimes called the '7-year rolling programme' of trust creation.

If the donor dies within 7 years of making a CLT, the CLT is re-assessed at the 40% death rate. Any lifetime IHT already paid is credited against the additional charge, and taper relief may reduce the extra liability if the donor survived more than 3 years from the CLT.

Ongoing Trust Charges: Periodic and Exit

Assets inside a discretionary trust following a CLT are subject to two ongoing IHT charges, introduced to prevent trusts from becoming permanent IHT shelters:

10-year periodic (anniversary) charge: On each 10th anniversary of the trust's creation, IHT is charged at up to 6% of the value of trust assets above the nil-rate band. The rate is calculated using a formula based on the value at the anniversary date and the trustees' cumulative transfers.
Exit charge: When capital leaves the trust (either to a beneficiary or on appointment out), an exit charge applies at a proportionate fraction of the 10-year rate, based on how many complete quarters of the 10-year period have elapsed since the last 10-year anniversary.

See our guide to discretionary trust periodic charges for the full calculation method.

Keeping CLTs Within the Nil-Rate Band

If the value of a CLT — after deducting any available annual exemption (£3,000 per year, £6,000 if the prior year's exemption was unused) — does not exceed the available nil-rate band, no immediate IHT charge arises. This is often called a 'nil-rate band trust' strategy.

A couple can each make a CLT of up to £325,000 into a discretionary trust in the same tax year, using their own nil-rate bands independently — a combined transfer of up to £650,000 with no immediate charge.

The nil-rate band freeze running to 2030 means more estate value is pulled into IHT — another reason why early CLT planning within the nil-rate band is valuable.

CLTs and Your Will

CLTs made during your lifetime reduce the nil-rate band available to your estate on death. A CLT made less than 7 years before death is included in the cumulation calculation for the death estate — meaning more of your estate may be charged at 40%.

When drafting your will alongside a lifetime CLT programme, ensure your executors understand the cumulation history. Consider including a nil-rate band discretionary trust in the will itself to use any remaining nil-rate band on death.

Frequently Asked Questions

What is a chargeable lifetime transfer (CLT)?

A chargeable lifetime transfer is any gift that is immediately chargeable to inheritance tax when made during the donor's lifetime. The most common type is a transfer of cash or assets into a discretionary trust (including a nil-rate band discretionary trust). Gifts to most other trusts created on or after 22 March 2006 — such as interest in possession trusts — are also CLTs. By contrast, a gift to an individual is a potentially exempt transfer (PET), which only becomes chargeable if the donor dies within 7 years.

How much IHT is payable on a CLT?

IHT on a CLT is calculated at 20% of the amount by which the CLT exceeds the donor's available nil-rate band (currently £325,000 for 2024–2026, frozen until at least 2030). The nil-rate band is reduced by any CLTs and failed PETs made in the preceding 7 years. If the trust pays the IHT, the rate is 20% of the excess. If the donor pays the IHT from their own assets, the gift is 'grossed up' and the effective rate rises to 25% of the net transfer (because the IHT itself is treated as an additional taxable gift).

What is the 7-year cumulation rule for CLTs?

When calculating whether a CLT exceeds the nil-rate band, HMRC looks back 7 years from the date of the CLT and totals all previous CLTs and failed PETs. The nil-rate band is applied against the earliest transfers first. Example: if you made a CLT of £200,000 in year 1 and another of £200,000 in year 5, the year-5 CLT uses only £125,000 of the remaining nil-rate band, so £75,000 is taxed at 20% (£15,000 IHT). The year-1 CLT drops out of account 7 years after it was made and frees up £200,000 of nil-rate band again.

What happens to CLTs when the donor dies within 7 years?

If the donor dies within 7 years of making a CLT, the CLT is re-assessed at the full 40% death rate. Any lifetime IHT already paid on the CLT is credited against the additional charge. The 40% death rate is reduced by taper relief if the donor survives between 3 and 7 years: 20% reduction for years 3–4 (32% effective rate), 40% for years 4–5 (24%), 60% for years 5–6 (16%), 80% for years 6–7 (8%). No taper relief applies in years 0–3. Importantly, taper relief reduces the additional tax due, not the value transferred — so if no additional tax arises (because the lifetime rate already covered it), taper relief provides no further benefit.

What are the ongoing trust charges on a discretionary trust?

Once assets are inside a discretionary trust following a CLT, two ongoing charges apply: (1) A 10-year periodic charge (also called an anniversary charge) — IHT at up to 6% of the trust's value above the nil-rate band, assessed every 10 years; (2) An exit charge when assets leave the trust — a proportionate fraction of the 10-year rate, based on how much of the 10-year cycle has elapsed. The maximum combined ongoing rate is 6% per decade, which is significantly lower than the 40% death rate. For this reason, CLTs into discretionary trusts can still be part of an efficient IHT strategy even when the immediate 20% charge arises.

How does a CLT differ from a potentially exempt transfer (PET)?

A PET is a gift made by an individual directly to another individual (or to a bare trust / disabled person's trust). It is immediately exempt from IHT and only becomes chargeable if the donor dies within 7 years. A CLT is immediately chargeable — IHT may be payable on the date of the gift, regardless of how long the donor survives. The trade-off is that a CLT into a discretionary trust allows the trustees to manage assets for a class of beneficiaries without the assets forming part of anyone's estate, while a PET passes assets directly and irrevocably to the recipient.

Plan Your Estate with WillSafe

IHT planning requires a will that works alongside your lifetime gifts. WillSafe helps you create a legally valid UK will online — with guides covering the full range of inheritance tax reliefs so your estate plan is as tax-efficient as possible.

Start Your Will Today

This article is for general information only and does not constitute legal or tax advice. IHT planning is complex — always consult a qualified private client solicitor or chartered tax adviser before making lifetime transfers into trust.