IHT 14-Year Rule: How Chargeable Lifetime Transfers Affect the Nil Rate Band on Death
Gifts into discretionary trusts (Chargeable Lifetime Transfers) use up the nil-rate band for 7 years from the date of the gift. If a Potentially Exempt Transfer (gift to an individual) is made within 7 years after the CLT and the donor later dies, the CLT's use of NRB reduces what is available to shelter the PET, even if the CLT was made up to 14 years before death.
Types of Lifetime Transfers: IHT Treatment Compared
| Type | Examples | IHT on making | IHT if donor dies within 7 years | Lookback period |
|---|---|---|---|---|
| Potentially Exempt Transfer (PET) | Gift to individual (adult child, friend) | None, wholly exempt if donor survives 7 years | Full IHT at up to 40% (taper relief if 3–7 years) | 7 years from date of gift |
| Chargeable Lifetime Transfer (CLT) | Gift into discretionary trust, gift to company | 20% on the value above the NRB at the time of the gift (with 7-year lookback for prior CLTs) | Recalculated at 40% death rate, reduced by entry charge; taper relief 3–7 years | 14 years from date of gift (7 years to determine NRB available + 7-year PET window) |
| Exempt transfer | Spouse/civil partner; charity; annual exemption; normal expenditure out of income | None | None, permanently exempt | N/A |
Frequently Asked Questions
What is the IHT 14-year rule and why does it arise?
The 14-year rule (or '14-year shadow') is not a statutory term, it describes the practical effect of how the nil-rate band is shared across lifetime transfers and death. IHT works by looking back 7 years from the date of each chargeable event to calculate how much NRB is still available. A Potentially Exempt Transfer (PET) that becomes chargeable on death shares the NRB with all other chargeable transfers in the 7 years before that PET. A Chargeable Lifetime Transfer (CLT), a gift into a discretionary trust, is itself chargeable at the time it is made, using up NRB for 7 years from the date of the CLT. If the donor makes a CLT at year 0, then a large PET at year 6, and dies at year 12: the PET (made at year 6) is within 7 years of death and becomes chargeable. When calculating the NRB available for the PET, HMRC looks back 7 years from the PET (to year -1), including the CLT at year 0. The CLT was made 6 years before the PET (within the 7-year lookback window for the PET). Even though the CLT is now 12 years old (so more than 7 years before death), it still uses up NRB available for the PET calculation. This means the donor effectively faces a 14-year exposure from each CLT: 7 years during which the CLT itself might be recalculated at death, plus another 7 years during which it might eat into the NRB available for a later PET.
How does a CLT into a discretionary trust affect IHT when the donor later dies?
When a donor transfers assets into a discretionary trust (a CLT), IHT is calculated at the time of the transfer: (1) Sum the CLT and all other CLTs in the 7 years before this CLT; (2) The first £325,000 (NRB) is taxed at 0%. The excess is taxed at 20% (the lifetime rate, which is half the death rate). The trust pays this entry charge. On the donor's death within 7 years of the CLT: the CLT is recalculated at the death rate (40%), with taper relief if 3–7 years elapsed. Any entry charge paid is credited. If the death rate produces more tax than the entry charge, the additional tax is payable, by the trustees (or executors, who may recover from the trustees). If death is more than 7 years after the CLT: the CLT drops out of the 7-year lookback for the death calculation. No additional IHT arises from the CLT on death. HOWEVER, the 14-year rule means the CLT's use of NRB continues to cast a shadow over any PETs made in the 7 years after the CLT, if those PETs fail (donor dies within 7 years of the PET), the NRB used by the CLT is still deducted.
Can you give a worked example of the 14-year rule in practice?
Example: Sandra makes the following gifts: January 2015 (Year 0): £325,000 into a discretionary trust (CLT). Entry charge: 0%, exactly uses the NRB. No immediate IHT. January 2021 (Year 6): £400,000 to her daughter Emma (PET). Sandra dies in January 2028 (Year 13). The PET (January 2021) was made 7 years before death (just outside the 7-year window, assume slightly less than 7 years so it falls within the window). The PET becomes chargeable at 40%, but how much NRB is available? HMRC looks back 7 years from the PET (January 2021), back to January 2014. The CLT (January 2015) falls within that lookback window (it was 6 years before the PET). The CLT used £325,000 of NRB. NRB available for the PET: £325,000 − £325,000 = NIL. The full £400,000 PET is taxable at 40% (less taper relief if applicable). IHT on the PET: up to £160,000. If Sandra had not made the CLT, Emma would have had the NRB available and the PET might have been fully or partially sheltered. The CLT at year 0 still affects the PET 6 years later, and the PET is still affecting IHT 13 years after the CLT. This is the 14-year shadow.
Does a gift into a bare trust count as a CLT or a PET for the 14-year rule?
A gift into a bare trust is treated as a gift to the beneficial owner (the named beneficiary), not as a gift into a trust for IHT purposes. Since the gift is directly to an identifiable individual beneficiary, it is a PET, not a CLT. The 7-year rule applies: the PET becomes exempt if the donor survives 7 years. The 14-year shadow does not arise for bare trusts. By contrast, a gift into a discretionary trust (where the trustees have discretion over who benefits) is a CLT, it is immediately chargeable at 20% on the excess above the NRB, and it creates the 14-year shadow. This distinction is why some taxpayers prefer bare trusts for younger beneficiaries: the gift is a PET (no entry charge, 7-year rule only), whereas a gift into a discretionary trust is a CLT (immediate entry charge, potential 14-year shadow on later PETs).
What is the difference between the 7-year rule for PETs and the 14-year rule for CLTs?
The 7-year rule for PETs: a PET to an individual becomes fully exempt if the donor survives 7 years. Taper relief reduces the IHT rate if the donor survives 3–7 years. The NRB available to shelter the PET is calculated by looking back 7 years from the PET, deducting any CLTs or other chargeable transfers in that window. The 14-year shadow for CLTs: a CLT into a trust is chargeable at 20% immediately. On death, a 7-year lookback recalculates CLTs at the full 40% rate. Any PET made within 7 years after a CLT (while the CLT is still using up NRB) will have reduced NRB available if the PET becomes chargeable, meaning the combined lookback period is potentially 14 years. Practically: if you have made (or are planning to make) large gifts into trusts, you need to consider both the direct 7-year recalculation risk on the CLT itself, AND the indirect 14-year risk that the CLT reduces NRB available for any PETs made in the 7 years after it. This requires careful sequencing of gifts and a professional IHT calculation if significant sums are involved.
Can I avoid the 14-year shadow by making PETs instead of CLTs?
Making PETs to individuals (rather than CLTs into trusts) avoids the 14-year shadow entirely. PETs do not affect the NRB available for future PETs, only CLTs (and death estate transfers) use up NRB. The ordering matters: PETs → PETs: each PET is assessed independently, looking back 7 years from that PET for CLTs or other chargeable transfers in the window. If no CLTs exist in the 7-year window, the NRB may be fully available. CLT → PET: the CLT uses NRB, creating a shadow over subsequent PETs for 7 years. If you die within 7 years of the PET (and the CLT is still within 7 years of the PET), the NRB is already used up. PET → CLT: the PET (being a PET, not a CLT) does not affect the CLT's entry charge calculation, only CLTs in the 7 years before the CLT are counted. Planning strategy: if you intend to make gifts both to individuals (PETs) and into trusts (CLTs), consider making the PETs first. This way, the CLT does not shadow the PETs, the PETs are already made and the 7-year clock has already started running.
Plan Your Gifting Sequence
The order in which you make lifetime gifts significantly affects how much IHT your beneficiaries will pay. A well-drafted will is the starting point, ensuring that what remains in your estate is distributed as tax-efficiently as possible.
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