IHT Gifting Rules Explained: PETs, Exempt Transfers, and CLTs

Gifting assets to children, grandchildren, and others is the most direct route to reducing an estate for IHT purposes. But the gifting rules under the Inheritance Tax Act 1984 are not simply "gift it and it's gone". There are minimum survival periods, a complex set of exemptions, ordering rules that affect how IHT is calculated, and anti-avoidance provisions that can keep a gift in your estate even after it has been transferred.

This guide explains the full framework in plain terms.

Potentially Exempt Transfers (PETs)

A potentially exempt transfer is any gift from an individual to another individual (or to a qualifying bare trust or interest-in-possession trust, with conditions). It is "potentially" exempt because:

• If the donor survives 7 years from the date of the gift: The gift is completely exempt from IHT. It falls out of the estate as if the gift had never been made.
• If the donor dies within 7 years: The PET becomes chargeable — it falls back into the estate and is subject to IHT. Taper relief reduces the effective rate for gifts made 3-7 years before death.

The 7-year clock starts from the date of the gift, not the date of death. Record the date carefully.

Unlimited size: There is no upper limit on the value of a PET. A £10m gift to a child is a PET and is entirely IHT-free if the donor survives 7 years. This is the most straightforward (if slowest) IHT planning route.

Taper relief on failed PETs:

Years Between Gift and Death	Taper Reduction on the Tax
0-3 years	0% reduction
3-4 years	20% reduction
4-5 years	40% reduction
5-6 years	60% reduction
6-7 years	80% reduction

Caution: Taper relief reduces the tax, not the value of the gift. And it only applies where the gift exceeds the available nil-rate band at death (after considering other charges). If the entire estate (including failed PETs) is within the nil-rate band, no taper is needed.

Annual Exemption: £3,000 Per Year

Every individual has an annual gift exemption of £3,000. Gifts of any kind totalling up to £3,000 per tax year are immediately exempt from IHT — not PETs, not chargeable. They leave the estate immediately with no conditions.

Carry-forward: If the annual exemption is not used in full in one tax year, the unused balance can be carried forward to the following tax year only (not beyond). Maximum available in one year if the prior year was also unused: £6,000.

Couples: Each spouse has their own £3,000 annual exemption. A married couple can give away £6,000 per year (£12,000 if the prior year's exemption was unused) with immediate IHT exemption.

The annual exemption is the most underused IHT relief. For individuals with large estates, consistently using the £3,000 annual exemption from their 50s or 60s can remove meaningful sums from the estate over a decade or more.

Small Gifts Exemption: £250 Per Person

In addition to the annual exemption, there is a small gifts exemption of £250 per recipient per tax year. You can give £250 to any number of people — the gift is immediately exempt. However, you cannot use the small gifts exemption to give the first £250 of a larger gift; the exemption applies only to complete gifts that do not exceed £250.

Wedding and Marriage Gifts

Gifts made in consideration of marriage or civil partnership are exempt from IHT up to:

• £5,000 from a parent;
• £2,500 from a grandparent;
• £1,000 from any other person.

The gift must be made before or on the wedding/registration day. If the marriage does not take place, the exemption falls away.

Gifts from Normal Expenditure out of Income

One of the most powerful — and most underused — IHT exemptions is the normal expenditure out of income exemption. Under IHTA 1984, s.21, a gift is exempt if:

1. It forms part of the normal expenditure of the transferor;
2. It is made out of income (not capital);
3. After making the gift, the transferor is left with sufficient income to maintain their usual standard of living.

"Normal" means regular and habitual — a pattern of giving over time, not a one-off payment. The amount need not be fixed; it can vary from year to year as long as it is part of a regular pattern.

Why it is powerful: There is no upper limit on the value of gifts that qualify under this exemption. A high earner with surplus income above their spending needs can potentially give away hundreds of thousands of pounds per year, entirely exempt from IHT, as long as the gifts are regular and from income.

What counts as income: The relevant income is all income received by the individual in the tax year — earnings, pension, investment income, dividends. Capital receipts do not count.

Evidence: HMRC expects to see evidence that the normal expenditure out of income exemption applies — typically a consistent pattern of gifts documented in a simple schedule. The IHT403 form asks executors to complete a schedule of regular gifts (including a year-by-year breakdown of income and expenditure) when claiming this exemption. Keep records as you go.

Chargeable Lifetime Transfers (CLTs)

Gifts into discretionary trusts are not PETs. They are chargeable lifetime transfers. A CLT:

• Is immediately chargeable at 20% on the value above the available nil-rate band at the time of the transfer;
• Uses up the nil-rate band (£325,000) — subsequent CLTs may be fully chargeable;
• Resets the nil-rate band availability after 7 years;
• If the donor dies within 7 years, a further IHT charge arises (the 20% already paid is credited against the death rate of 40%, so effectively an additional 20% at most is due).

Chargeable transfers also include: gifts into most types of relevant property trust (including discretionary trusts) and gifts to companies (other than to a close company owned by the donor's family in certain circumstances).

Nil-rate band planning: Each individual has one nil-rate band of £325,000 (unchanged since 2009). A CLT uses the nil-rate band. If you make a CLT of £300,000, your remaining nil-rate band for seven years (until the CLT drops out) is only £25,000. Subsequent CLTs will be immediately chargeable at 20%.

The LIFO Ordering Rule: The "Death Tax" Calculation

When an individual dies within seven years of making both PETs and CLTs, the LIFO (last in, first out) ordering rule determines how the nil-rate band is allocated:

1. Chargeable transfers in the 7 years before death are set against the nil-rate band first — in chronological order (earliest first).
2. Failed PETs are then set against whatever nil-rate band remains.

Example: Anne made a CLT of £250,000 three years ago (into a discretionary trust) and a PET of £200,000 to her daughter two years ago. She dies today. Her NRB is £325,000.

• CLT of £250,000 absorbs £250,000 of NRB. Remaining NRB: £75,000.
• Failed PET of £200,000: only £75,000 is covered by remaining NRB. The £125,000 balance is chargeable at 40%. IHT: £50,000.

Without the CLT, the full £325,000 NRB would cover the PET and no IHT would arise. The CLT "used up" the NRB, making the PET partially chargeable.

Lesson: When planning a CLT (e.g., funding a discretionary trust), consider the timing relative to any PETs and whether an order that protects PETs from the CLT's nil-rate band usage would be preferable.

Gift with Reservation of Benefit (GROB)

A gift with reservation of benefit is one of the most important anti-avoidance provisions in IHT. Under the rules in s.102 and Schedule 20 of the Finance Act 1986, if you give away property but continue to benefit from it — or if the gift is not made "outright and unconditionally" — the gift is treated as remaining in your estate.

Classic examples:

• Giving your house to your children but continuing to live in it rent-free;
• Giving away investments but retaining control over them;
• Giving away shares but continuing to receive dividends.

Consequences: On death, the property is treated as if it had never been given away — included in the estate at its death-time value (not its value at the date of gift). The PET or CLT treatment does not apply.

Exception: If a donor pays full market rent for the continued use of a gifted asset (e.g., paying rent to children who now own the house), the reservation is no longer present. But full market rent must genuinely be maintained throughout.

Tax rules around gifting are complex and change. This article reflects the IHT legislation as of June 2026 and is intended as a general guide. For advice specific to your estate planning circumstances, consult a qualified UK tax adviser.

How Global Investments Can Help

Gifting strategy — used alongside trusts, life insurance, and investment planning — is central to effective IHT planning for HNW families. Global Investments helps clients develop a structured, documented gifting programme, ensuring exemptions are fully used, that surplus income gifts are evidenced and positioned correctly, and that any trusts are properly co-ordinated. Contact us for a comprehensive IHT review.