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. Additionally, 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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