Potentially Exempt Transfer UK (2026): What Is a PET and How Does It Work?

A potentially exempt transfer (PET) is a gift made by an individual to another individual (or to certain types of trust) that is potentially exempt from inheritance tax (IHT). It is 'potentially' exempt because exemption is not guaranteed at the time of the gift — it depends on whether the donor (the person making the gift) survives 7 years from the date of the gift. If the donor does survive 7 years, the gift becomes fully exempt from IHT. If the donor dies within 7 years, the gift is a 'failed PET' and may attract IHT, though taper relief reduces the rate if the donor survived at least 3 years. PETs are defined in s3A Inheritance Tax Act 1984.

A PET must be an outright gift by an individual to: another individual (person, not company); a bare trust (absolute trust) for a named beneficiary; an accumulation and maintenance trust (legacy pre-Finance Act 2006 trusts may apply); or a disabled person's trust under IHTA 1984 s89. Most simple cash gifts to family members are PETs. Gifts to discretionary trusts do NOT qualify as PETs — they are chargeable lifetime transfers (CLTs) and may attract IHT at the time of the gift. Gifts to companies are also not PETs. The gift must not be a gift with reservation of benefit (GWR) — if the donor continues to benefit from the gifted asset, HMRC treats it as still part of the estate and the PET status is lost.

Once 7 years have passed from the date of the gift, the PET becomes fully exempt from IHT and falls permanently outside the donor's estate. It is no longer included in any cumulation calculations. The recipient does not need to report it or pay any IHT. No HMRC forms are required after the 7-year period has elapsed. This is the core objective of gifting as part of IHT planning: make gifts early enough that you survive 7 years and the assets leave your estate completely.

A failed PET is a gift that was treated as a PET at the time it was made but becomes subject to IHT because the donor died within 7 years of the gift date. When a PET fails: the gift is brought back into the cumulation of the donor's estate; the nil rate band (£325,000 in 2026) is applied against the oldest gifts first; any failed PET that exceeds the NRB (or uses it up) is charged at the full 40% IHT rate — or at a tapered rate if the donor survived more than 3 years. The IHT on a failed PET is primarily the liability of the recipient (the donee), not the estate. Executors must disclose all PETs made within 7 years of death on HMRC form IHT403.

Taper relief reduces the IHT rate on failed PETs where the donor survived more than 3 years. The reduction table is: 0–3 years before death — no relief (40% rate); 3–4 years — 20% relief (effective 32%); 4–5 years — 40% relief (effective 24%); 5–6 years — 60% relief (effective 16%); 6–7 years — 80% relief (effective 8%). Crucially, taper relief reduces the tax payable, not the value of the gift used against the NRB. A failed PET of £300,000 still uses £300,000 of the NRB even if taper relief applies to any IHT arising on the excess. This is the most commonly misunderstood aspect of taper relief. See our full guide on taper relief for worked examples.

A PET is an outright gift to an individual or bare trust — no IHT is charged at the time, and it becomes fully exempt after 7 years. A chargeable lifetime transfer (CLT) is a gift into a discretionary trust or certain other arrangements — IHT at 20% is charged at the time of the gift if the CLT exceeds the available nil rate band, and further IHT may be payable on death if the donor dies within 7 years. CLTs also affect the available NRB for subsequent PETs and CLTs in the 7-year cumulation window. CLTs are subject to 10-year periodic charges (up to 6% of the trust value) and exit charges when funds are distributed. PETs are far more straightforward — no immediate tax, no periodic charges — but only available for outright gifts to individuals.

No — PETs do not need to be reported to HMRC at the time they are made. There is no form to file and no IHT to pay. However, you should keep a clear record of: the date of each gift, the amount or value of the gift, the recipient, and the nature of the asset gifted. Executors must report all PETs made within 7 years of death on form IHT403 ('Gifts and other transfers of value'). Without proper records, executors may struggle to complete the IHT return accurately, which can delay probate and lead to disputes with HMRC. If a PET involves property or other non-cash assets, a contemporaneous valuation should also be recorded.

Yes. IHT exemptions — such as the £3,000 annual exemption, the £250 small gift exemption, normal expenditure from income, and marriage gifts — are applied to gifts before the PET rules. This means you can give away exempt amounts each year without those gifts being treated as PETs at all. Once the exemptions are used, any further gifts to individuals are PETs and start the 7-year clock. It is good practice to use exemptions first (documented carefully) and then make any larger gifts on top. This maximises the amount removed from the estate immediately (via exemptions) while minimising the cumulative value of PETs subject to IHT if you die within 7 years.