A Potentially Exempt Transfer is one of the most powerful tools for reducing inheritance tax in England and Wales. Make a gift to an individual, survive 7 years, and the gift falls completely outside your taxable estate. This guide explains everything you need to know.
Potentially Exempt Transfers sit at the heart of lifetime inheritance tax planning. Here are the six key principles every testator should understand.
Any outright gift to an individual that exceeds your available IHT exemptions becomes a PET. This includes cash, investments, property, and other assets transferred directly to a person (not a trust).
A PET starts a 7-year clock from the date the gift is made. If you survive the full 7 years, the gift falls completely outside your estate and no IHT is payable on it.
If you die within 7 years of making a PET, it becomes a "failed PET". The value of the gift is added back to your estate for IHT purposes, potentially triggering a tax charge.
If you die between 3 and 7 years after making a PET, taper relief reduces the IHT rate on the gift — from 40% down to as little as 8% — depending on how many years have passed.
PETs only apply to outright gifts to individuals. Gifts into most trusts are Chargeable Lifetime Transfers (CLTs), not PETs, and are subject to different — and often more immediate — tax rules.
Your executors must report all PETs made in the 7 years before death on the IHT return. Without accurate records, HMRC may challenge the estate and penalties can arise.
Understanding the lifecycle of a PET — from the date of the gift through to the 7-year anniversary — is essential for effective planning.
The Gift is Made
You make an outright gift to an individual — for example, £50,000 to your adult child. The gift exceeds your available annual exemption (£3,000), so the excess becomes a PET. No IHT is payable at this point.
The 7-Year Clock Starts
From the date of the gift, a 7-year countdown begins. You should record the exact date, amount, and recipient in a gift log. No reporting to HMRC is required at this stage.
Scenario A — You Survive 7 Years
If you are still alive 7 years after the date of the gift, the PET becomes fully exempt. The £50,000 falls completely outside your estate. No IHT is ever payable on it, regardless of the size of your estate.
Scenario B — You Die Within 7 Years
The PET becomes a "failed PET". Your executors must report it on the IHT return. The £50,000 is added to your estate. The nil-rate band (£325,000) is applied to failed PETs first. If the total exceeds the available nil-rate band, IHT at 40% (reduced by taper relief if applicable) is charged.
The Nil-Rate Band Is Applied to PETs First
When calculating IHT on a failed PET, the nil-rate band (£325,000) is applied to the oldest gifts first. This means large PETs made early in the 7-year period can erode the nil-rate band available to your estate — potentially increasing the IHT payable on your remaining assets.
If you die between 3 and 7 years after making a PET, taper relief reduces the IHT rate. The longer you survive, the lower the rate.
| Years Since Gift | IHT Rate | Taper Reduction | Notes |
|---|---|---|---|
| 0 – 3 years | 40% | 0% | |
| 3 – 4 years | 32% | 20% | |
| 4 – 5 years | 24% | 40% | |
| 5 – 6 years | 16% | 60% | |
| 6 – 7 years | 8% | 80% | |
| 7+ years | 0% | 100% |
Important: Taper relief reduces the rate of IHT on the gift — not the value of the gift itself. It only applies where the total value of PETs in the 7 years before death exceeds the nil-rate band (£325,000). If your gifts fall below this threshold, the nil-rate band absorbs them entirely and taper relief is irrelevant.
These categories of gift are exempt from IHT immediately — no 7-year waiting period, no PET status. Use them first before making larger gifts.
Annual Exemption
£3,000 per year
Unused allowance carries forward one year only. Couples can combine for £6,000.
Small Gift Allowance
£250 per person
Give up to £250 to as many individuals as you like each tax year. Cannot be combined with other exemptions for the same recipient.
Wedding / Civil Partnership Gifts
Up to £5,000
£5,000 to a child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else — given on or shortly before the ceremony.
Normal Expenditure Out of Income
No upper limit
Regular gifts from surplus income — not capital — can be fully exempt. Must be habitual, from income, and must not reduce your standard of living.
Maintenance Payments
Reasonable amounts
Payments for the maintenance of a spouse, civil partner, dependent child (under 18 or in full-time education), or dependent relative.
Charitable Gifts
Unlimited
Gifts to UK registered charities are fully exempt from IHT both during lifetime and on death.
Not all lifetime gifts are PETs. Gifts into trusts are usually CLTs — with very different tax consequences.
| Aspect | PET (Gift to Individual) | CLT (Gift to Trust) |
|---|---|---|
| Recipient | An individual (person) | A trust (usually discretionary) |
| Immediate tax charge? | No — tax only arises if you die within 7 years | Yes — 20% IHT on amounts above the nil-rate band at the time of the gift |
| 7-year rule | Applies — gift becomes fully exempt after 7 years | Applies — but additional periodic and exit charges also apply to the trust |
| Taper relief | Available if death occurs 3–7 years after the gift | Available on the additional IHT due on death, but trust charges continue |
| Ongoing tax | None — once 7 years pass, no further tax | 10-year periodic charge (up to 6% of trust value) and exit charges on distributions |
These are the errors we see most frequently — and the ones that can cost estates tens of thousands of pounds.
If you give away your home but continue to live there without paying a commercial market rent, the gift is treated as a "gift with reservation of benefit". The 7-year clock never starts — the property remains in your taxable estate regardless of how long you survive.
Taper relief only applies where the total value of PETs in the 7 years before death exceeds the nil-rate band (£325,000). If your gifts fall below this threshold, taper relief is irrelevant — the nil-rate band absorbs the gift first.
Gifts into most trusts are CLTs, not PETs. A gift of £325,001 into a discretionary trust triggers an immediate 20% IHT charge on the excess. Always take advice before gifting into trust.
The 7-year clock starts on the date the gift is made. Without a written record, your executors cannot prove when the gift occurred — HMRC may treat it as made at a later date, reducing the taper relief available.
Lifetime Gifts
The complete guide to making tax-efficient lifetime gifts.
Seven-Year Rule for Gifting Property
How the 7-year rule applies specifically to property gifts.
Inheritance Tax Taper Relief
How taper relief reduces IHT on failed PETs in detail.
Nil Rate Band Explained
Understanding the £325,000 threshold and how it interacts with PETs.
Our wills and estates solicitors can help you structure lifetime gifts tax-efficiently, avoid the gift with reservation of benefit trap, and ensure your estate plan is as robust as possible.
Speak to a wills and estates solicitor today. Sensitive, professional advice — costs explained clearly before any work begins.
No obligation — talk through your options first. Chester, Cheshire & North Wales.
Lifetime Gifts
The complete guide to making tax-efficient lifetime gifts.
Nil Rate Band Explained
Understanding the £325,000 nil-rate band and how it works.
Inheritance Tax Taper Relief
How taper relief reduces IHT on failed PETs.
Seven-Year Rule for Gifting Property
How the 7-year rule applies to property gifts.
Gifts with Reservation of Benefit
The trap that stops the 7-year clock — explained.
Life Insurance for IHT
Gift Inter Vivos policies to cover IHT on failed PETs.
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