Chargeable Lifetime Transfers (CLTs) and Inheritance Tax UK: Gifts to Trusts and the 20% Lifetime Rate (2026)
CLTs — typically gifts to discretionary trusts — are immediately chargeable at 20% on the amount above the NRB (£325,000). Unlike PETs (gifts to individuals), there is no 7-year exemption. CLTs use the NRB immediately, which can expose subsequent PETs. Make PETs before CLTs where possible. CGT holdover relief (s260 TCGA 1992) defers CGT on appreciated assets transferred into trust.
| Feature | PET (Gift to Individual) | CLT (Gift to Discretionary Trust) |
|---|---|---|
| Immediate IHT cost? | No — PET is conditionally exempt | Yes — 20% on amount above NRB |
| 7-year rule applies? | Yes — fully exempt if donor survives 7yr | No — 20% charged on day 1; 40% recalculated if death within 7yr |
| NRB used immediately? | No — only used if PET fails | Yes — immediately reduces available NRB |
| CGT holdover relief? | No (s165 TCGA for business assets only) | Yes — s260 TCGA 1992 (joint election) |
| Asset protection for recipient? | None — recipient owns outright | Yes — trust structure protects assets |
| Ongoing trust charges? | None | 10yr periodic charge + exit charges |
| Control after gift? | None (donor must give up control) | Trustees control distribution (donor can be trustee) |
Chargeable Lifetime Transfers: Complete Guide
What is a Chargeable Lifetime Transfer (CLT)?
A Chargeable Lifetime Transfer (CLT) is a gift that is immediately chargeable to inheritance tax at the lifetime rate (20% of the amount above the NRB). The most common CLTs are: (1) Gifts to discretionary trusts (relevant property trusts — Part III IHTA 1984); (2) Gifts to companies; (3) Gifts to certain accumulation and maintenance trusts (post-Finance Act 2006); (4) Gifts by a company. CLTs are contrasted with Potentially Exempt Transfers (PETs — s3A IHTA 1984): PETs (gifts to individuals) are not immediately chargeable — they become exempt if the donor survives 7 years, and only become chargeable if the donor dies within 7 years. CLTs are immediately chargeable even if the donor survives the gift — a CLT of £500,000 into a discretionary trust triggers a 20% IHT liability on the amount above the NRB immediately, regardless of whether the donor survives 7 years. The distinction matters enormously: a PET of £500,000 has £0 IHT cost if the donor lives 7 years; a CLT of £500,000 triggers IHT immediately (the calculation: £500,000 - £325,000 NRB = £175,000 × 20% = £35,000). If the donor pays the tax, that is the cost. If the trust pays the tax, a 'grossing up' calculation is needed (effectively increasing the chargeable amount).
The 20% lifetime rate and grossing up
The lifetime rate of IHT on CLTs is 20% (half the 40% death rate). The 20% is applied to the CLT amount above the available NRB (£325,000, reduced by any CLTs made in the 7 years before this CLT). Who pays the 20%? (1) Donor pays: the 20% comes from the donor's own resources. The trust receives the full CLT amount. In this case, the CLT value for NRB purposes is the gross amount transferred; (2) Trust pays: if the trust fund itself pays the IHT, a 'grossing up' is required — the CLT amount must be grossed up to arrive at the 'gross chargeable amount' on which the tax is 20%. Example: donor wants to put £400,000 (after NRB) into a trust where the trust pays the IHT. If tax rate is 20%, the gross chargeable amount is £400,000 / (1 - 20%) = £500,000. Trust IHT = £500,000 × 20% = £100,000; net received = £400,000. Grossing up means the tax effectively becomes 25% of the net amount transferred when the trust pays. Planning point: where possible, the donor should pay the IHT on CLTs — avoiding the grossing up uplift and preserving more in the trust.
CLTs and the nil-rate band: cumulation
CLTs use the NRB immediately and reduce the NRB available for subsequent CLTs and for any failed PETs in the 7 years after the CLT. The 7-year cumulation rule: when calculating the IHT on a CLT, the NRB is reduced by all CLTs made in the 7 years before the current CLT. This means: (1) If the NRB is £325,000 and a CLT of £200,000 is made in 2024: NRB available = £325,000 - £200,000 = £125,000. A further CLT of £125,000 in 2025 uses the remaining NRB. A CLT of £150,000 in 2026 has NRB of £325,000 - (£200,000 + £125,000) = £0. The £150,000 is fully subject to 20% IHT; (2) CLTs also reduce the NRB available for any failed PETs: if a CLT was made 3 years before a failed PET, the CLT uses the NRB first — the PET (if it fails) may be fully chargeable at 40% even though it was below the NRB. The planning implication: make PETs before CLTs. A PET uses the NRB only if it fails; a CLT uses it immediately. Putting a CLT before a PET can leave the PET exposed even though there would have been NRB available if the CLT had not been made.
What happens if the donor dies within 7 years of a CLT?
If the donor dies within 7 years of making a CLT: (1) The CLT is reconsidered at the 40% death rate (rather than the 20% lifetime rate); (2) Taper relief applies as for failed PETs — years 3–7 reduce the death rate: 32%, 24%, 16%, 8%, 0% at 7 years; (3) The 20% lifetime tax already paid is credited against the death rate tax liability — the estate pays the top-up (the difference between the 40% death rate and the 20% already paid, subject to taper); (4) If taper relief reduces the rate to below 20%: no refund of the overpaid lifetime tax — the 20% already paid is the minimum. Example: CLT of £500,000 (£175,000 above NRB); lifetime IHT paid = £35,000 (20% × £175,000). Donor dies 4 years later; taper reduces rate to 24% (40% × 60%); death IHT = £42,000 (24% × £175,000); credit for lifetime tax = £35,000; additional IHT payable = £42,000 - £35,000 = £7,000. If the donor dies 3 years later (full 40% rate): death IHT = £70,000; credit = £35,000; additional IHT = £35,000.
CLT vs PET: choosing between gifts to individuals and trusts
The choice between making a PET (gift to an individual) and a CLT (gift to a discretionary trust) involves significant trade-offs: (1) PET advantages: no immediate IHT cost; if donor survives 7 years, fully exempt; simpler and cheaper (no trust setup, no trustee obligations, no periodic/exit charges). PET disadvantages: the recipient owns the asset outright — no control retained; if the recipient divorces, becomes bankrupt, or dies young, the asset is in their estate/matrimonial pot; (2) CLT advantages: trust structure allows discretionary distribution among multiple beneficiaries; trustees can respond to changing family circumstances; asset protection from beneficiary's creditors, divorce, or bankruptcy. CLT disadvantages: immediate 20% IHT cost on amounts above NRB; ongoing 10-year periodic charge and exit charges; trustee obligations and administration costs; professional trust management typically needed. When a CLT is preferred: where the goal is asset protection rather than pure IHT saving; where the donor wants to retain some control (as a trustee) over how the assets are distributed; where the beneficiaries are minors, have disabilities, or where the donor is concerned about the beneficiary's financial management. Most straightforward family gifting uses PETs — CLTs are for structured trust planning with specific non-tax objectives.
CGT holdover relief on CLTs
A CLT of a chargeable asset (shares, property, business interests) is a disposal for Capital Gains Tax purposes. However, s260 TCGA 1992 provides holdover relief for CLTs — the donor and trustee can jointly elect to hold over the gain, so that: (1) No CGT is payable by the donor at the time of the CLT; (2) The trustees take the asset at the donor's original base cost (i.e. with the held-over gain embedded); (3) When the trustees later sell the asset (or distribute it), the held-over gain crystallises in the trustee's hands (subject to CGT in the trust at 24% rate post-October 2024 for residential property or 20% for other assets, subject to any annual exempt amount available to the trust). The holdover election is important for business owners, farmers, or investors making CLTs of appreciated assets — without holdover, the CLT triggers both IHT (at 20%) AND CGT on the same transaction. With holdover relief, only the IHT (20%) is paid immediately; the CGT is deferred until the asset is sold from the trust.
Frequently Asked Questions
What is a Chargeable Lifetime Transfer (CLT) for inheritance tax?
A CLT is a gift that is immediately chargeable to IHT — unlike a PET, which is conditionally exempt. CLTs arise primarily on gifts to discretionary trusts. The lifetime rate is 20% of the amount above the NRB (£325,000). If the donor dies within 7 years, the CLT is recalculated at the full 40% death rate (with a credit for the 20% already paid). CLTs use the NRB immediately — unlike PETs, which use the NRB only if they fail.
What is the IHT rate on a Chargeable Lifetime Transfer to a trust?
The lifetime rate is 20% of the amount above the NRB (£325,000) — half the standard 40% death rate. If the donor dies within 7 years, the CLT is reconsidered at 40% (subject to taper relief in years 3–7) and the 20% already paid is credited. If taper reduces the death rate below 20%, no refund is given — the 20% lifetime rate is the minimum cost for a CLT.
Should I make PETs or CLTs to reduce inheritance tax?
For most families, PETs (gifts to individuals — children, grandchildren) are preferable: no immediate IHT cost; if you survive 7 years, the gift is fully exempt. CLTs (gifts to discretionary trusts) have an immediate 20% IHT cost but offer asset protection (from beneficiary's divorce, bankruptcy, or poor management) and flexibility for multiple beneficiaries. Use PETs for straightforward gifting where the recipient is trustworthy and financially capable. Use CLTs for structured trust planning where asset protection or control is the priority.
Can I claim CGT holdover relief when making a gift to a trust?
Yes — s260 TCGA 1992 provides CGT holdover relief on CLTs. The donor and trustees jointly elect to hold over the gain — no CGT is payable by the donor at the date of the CLT; the trustees take the asset at the donor's original base cost. CGT is deferred until the trustees sell or distribute the asset. Holdover relief is essential for CLTs of appreciated assets (shares, business interests, farm land) — without it, the CLT triggers both IHT (20%) and CGT at the same time.
What are the tax charges on a discretionary trust funded by a CLT?
A discretionary trust (relevant property trust) funded by a CLT is subject to: (1) The initial 20% lifetime IHT on the CLT above the NRB; (2) 10-year periodic charge (s64 IHTA 1984) — up to 6% of the trust value above the NRB every 10 years; (3) Exit charges (s65 IHTA 1984) — proportionate charge when assets leave the trust. The 10-year charge is typically 6% × (trust value - NRB): for a trust funded with £325,000 (the NRB), the periodic charge is £0 if the trust value has not grown above the NRB; for a larger trust, the ongoing charges can be significant.
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