Gifts Inter Vivos UK: PETs, CLTs, the 7-Year Rule and IHT on Lifetime Gifts
Updated 31 May 2026 · 10 min read · Inheritance Tax & Lifetime Giving
Lifetime giving is one of the most powerful tools in inheritance tax (IHT) planning — but the rules are detailed and the traps are serious. Understanding the difference between a potentially exempt transfer (PET) and a chargeable lifetime transfer (CLT), knowing when a gift creates a “reservation of benefit,” and keeping accurate records are all essential to making lifetime giving work.
The Two Types of Lifetime Gift
Every lifetime gift falls into one of two categories for IHT:
| Type | Examples | Taxed immediately? | Taxed on death within 7 years? |
|---|---|---|---|
| Potentially exempt transfer (PET) | Cash to children, ISA to grandchild, house to sibling (outright) | No | Yes — “failed PET” included in estate |
| Chargeable lifetime transfer (CLT) | Gift into a discretionary trust; gift to a company | Yes — at 20% (or 25%) | Possible — additional charge if donor dies within 7 years |
PETs: The 7-Year Rule
A PET is a gift from one individual to another individual. If the donor survives 7 years from the date of the gift, the gift is fully exempt from IHT — it drops out of the calculation entirely. If the donor dies within 7 years:
- The PET becomes a “failed PET” and is added back into the donor’s cumulative estate.
- Failed PETs are cumulated with the estate at death and “eat into” the available nil-rate band — the oldest gifts use the band first.
- IHT on a failed PET is calculated at the death rate (40%), reduced by taper relief if the donor survived 3–7 years.
The 7-year clock starts on the date the gift is made — not the date of death. Keeping accurate dated records of every significant gift is therefore essential.
Taper Relief on Failed PETs
If the donor dies between 3 and 7 years after making a PET, taper relief reduces the IHT due on that failed PET:
| Years between gift and death | Tax rate | Taper reduction |
|---|---|---|
| 0–3 years | 40% | None |
| 3–4 years | 32% | 20% |
| 4–5 years | 24% | 40% |
| 5–6 years | 16% | 60% |
| 6–7 years | 8% | 80% |
| 7+ years | 0% | Fully exempt |
Important: taper relief only reduces the tax on the amount that exceeds the available nil-rate band. Where the failed PET is covered entirely by the nil-rate band, taper relief has no practical effect — there is no tax to reduce. This is a common misconception.
CLTs: Immediately Chargeable Gifts
A CLT is taxed at 20% on the amount exceeding the available nil-rate band at the time it is made. The nil-rate band is £325,000 (unchanged since 2009, frozen until 2030). CLTs made in the 7 years before each CLT are cumulated — so if you made a £200,000 CLT 5 years ago, you only have £125,000 of nil-rate band remaining today. Key consequences:
- If you subsequently make a PET, the CLT uses up nil-rate band that would otherwise shelter the PET — CLTs “use the band before PETs.”
- If you die within 7 years of the CLT, an additional death charge may arise at 40%, less credit for the lifetime tax paid.
- The trustees of the discretionary trust receiving the CLT may also face periodic charges (10-year anniversary charge) and exit charges.
The Gift with Reservation Trap
A gift with reservation of benefit (GWR) occurs where the donor gives property away but retains a benefit — for example, giving the family home to children while continuing to live there rent-free. GWR assets are treated as still forming part of the donor’s estate for IHT, regardless of the gift. Giving the home away while living in it achieves nothing for IHT unless the donor pays a full market rent to the recipients and complies with all associated formalities. This is the most common and costly IHT planning mistake in England and Wales.
IHT Exemptions to Use Systematically
- Annual exemption£3,000 per tax year; carry forward one year’s unused allowance. Both spouses/civil partners have their own allowance (£6,000 combined per year).
- Small gifts exemptionUp to £250 per recipient per tax year — cannot combine with annual exemption for same person.
- Wedding gift exemptionParent: £5,000; grandparent: £2,500; anyone else: £1,000.
- Normal expenditure out of incomeRegular gifts from surplus income — can shelter large sums if properly documented (Form IHT403).
- Charitable givingImmediately exempt — and qualifying for the 36% IHT rate if 10%+ of estate given to charity in the will.
Recording Lifetime Gifts
There is no requirement to report PETs to HMRC when made — only when they fail (the donor dies within 7 years) do they appear on the IHT400. But a personal representative who cannot reconstruct the gift history faces HMRC investigation and potential penalties. Maintain a gift log: date, recipient, value, asset description, which exemption (if any) was used, and whether any condition or benefit was retained. Review it each April and retain bank statements showing the transfers. The log is not a legal requirement but is the single most practical action a donor can take to protect their estate and their personal representative.
FAQs
What is a potentially exempt transfer (PET) for IHT purposes?
A potentially exempt transfer (PET) is a lifetime gift made by an individual to another individual (or to certain types of trust) that is exempt from inheritance tax if the donor survives for 7 years after making the gift. The term 'potentially exempt' reflects the fact that the gift is not immediately taxed, but the IHT exemption is only confirmed once 7 years have passed. If the donor dies within 7 years, the PET becomes a 'failed PET' and is brought back into the donor's cumulative estate for IHT purposes — taxed at 40% (or reduced by taper relief if the donor survived 3–7 years). Key points: (1) A PET must be an outright gift to an individual (not to a discretionary trust). (2) The donor must not retain any benefit from the gifted property — otherwise it is a 'gift with reservation of benefit' (GWR), which is far more dangerous. (3) The 7-year period runs from the date of the gift, not from death. (4) PETs made within the 7 years before death are cumulated, with the earliest gifts 'eating into' the nil-rate band first.
What is a chargeable lifetime transfer (CLT) and how is it taxed?
A chargeable lifetime transfer (CLT) is a gift that is immediately chargeable to inheritance tax when made — unlike a PET, which is only taxed if the donor dies within 7 years. The main types of CLT are gifts into discretionary trusts and gifts to companies. The IHT rate on a CLT is 20% (half the death rate of 40%) if the donor pays the tax, or 25% if the trust pays. The CLT is charged against the donor's available nil-rate band (currently £325,000); any excess is taxed at 20%/25%. CLTs made in the 7 years before a PET affect the PET's nil-rate band calculation — CLTs 'use up' the band before PETs are allocated. If the donor dies within 7 years of making a CLT, an additional IHT charge may arise (at the death rates, with credit for the lifetime tax already paid). CLTs made more than 7 years before death are excluded from the cumulation calculation.
What is a gift with reservation of benefit (GWR) and why is it dangerous?
A gift with reservation of benefit (GWR) arises where a donor makes a gift but retains a benefit from the gifted property — for example, giving the family home to children but continuing to live in it rent-free. GWR rules under the Finance Act 1986 mean that a GWR asset is treated as remaining in the donor's estate for IHT purposes until the reservation is released. The danger: (1) The asset is fully included in the donor's estate on death as if no gift was made — the gift achieved nothing for IHT. (2) If the reservation is released, the donor is treated as making a PET at the date of release, starting a new 7-year clock. (3) Both the donor and the donee may be charged — GROB rules can create double charges. Common traps: giving the house to children while living there without market rent; giving a holiday home to children but continuing to use it; using a 'discounted gift scheme' incorrectly. Solution: any gift of a property the donor will continue to use must be accompanied by payment of a full market rent to the donee to avoid GWR. The 'pre-owned assets tax' (POAT) under Finance Act 2004 is a further income tax charge that can apply to assets given away before 2006 where GWR rules were avoided.
What are the main IHT exemptions available for lifetime gifts?
The main exemptions that can shelter lifetime gifts from IHT are: (1) Annual exemption — £3,000 per tax year. Unused exemption from the prior year can be carried forward by one year only. Each donor has their own annual exemption, so a married couple can give £6,000 per year combined (£3,000 each). (2) Small gifts exemption — up to £250 per recipient per tax year. Cannot be combined with the annual exemption for the same recipient. (3) Wedding / civil partnership gift exemption — parents can give £5,000 each; grandparents £2,500 each; anyone else £1,000. The gift must be made on or shortly before the wedding. (4) Normal expenditure out of income exemption — gifts that are part of a regular pattern of giving, from the donor's surplus income (after normal living costs), with no capital depletion. This can shelter large regular gifts. (5) Gifts for family maintenance — gifts for the maintenance of a spouse/civil partner, dependent children, or financially dependent relatives. (6) Gifts to charities and political parties — immediately exempt.
How should donors record lifetime gifts for IHT purposes?
There is no statutory requirement to report lifetime gifts to HMRC at the time they are made — PETs only enter the IHT picture if the donor dies within 7 years. However, failing to keep records creates serious problems for the estate: the personal representative must identify all gifts made in the 7 years before death for the IHT400 account, and HMRC can impose penalties for inaccurate returns. Best practice: keep a gift log recording the date, recipient, description and value of every significant gift. The log should note: whether the annual or other exemption was claimed; whether a GWR could arise; and, for assets (not cash), the market value at the date of gift (needed to calculate the PET if it fails). Retain records of the bank transfers or asset transfers used to make the gift. Many financial advisers recommend updating the log each April (at the end of the tax year) so exemptions are properly allocated. A personal representative who inherits a donor with no gift records faces a difficult HMRC inquiry if the donor died within 7 years of making large gifts — and personal liability for IHT not collected.
Can I give my house to my children and still live in it to save inheritance tax?
This is one of the most common IHT planning misconceptions. Giving your home to your children while continuing to live in it rent-free creates a gift with reservation of benefit (GWR) under the Finance Act 1986 — the property is treated as still forming part of your estate for IHT, so no IHT saving is achieved. To avoid GWR, you would need to pay your children a full market rent for the right to occupy the property. This creates: (1) income tax liability for your children on the rental income; (2) the need for a formal tenancy agreement; (3) CGT complications when they eventually sell; and (4) the care that the rent must genuinely be market rent, re-negotiated as rents change. There is also no CGT principal private residence relief for your children on a property they do not live in (subject to the letting rules). The alternative approach — an equity release plan or a downsizing to release capital — is often more tax-efficient. For most people, the simplest and most effective IHT planning is a combination of annual gifting, pension planning, life insurance in trust, and will drafting rather than giving away the home.
Lifetime Giving Works Best Alongside a Good Will
Lifetime gifting reduces the estate that will eventually be subject to IHT — but a will remains essential to ensure the residue is distributed according to your wishes. WillSafe’s DIY will kit for England and Wales lets you put your estate plan in place today.
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