PETs vs CLTs: What You Should Know About Lifetime Gifts And Inheritance Tax

When it comes to passing on wealth efficiently, lifetime gifting can be one of the most effective tools in your estate planning strategy. But not all gifts are treated equally — and for high-net-worth (HNW) families, understanding the distinction between PETs and CLTs can mean the difference between zero tax and an immediate 20% charge.

What is a PET?

A Potentially Exempt Transfer (PET) is a gift made to another individual (e.g. a child or grandchild), or into a bare trust. It’s “potentially” exempt because, if the donor survives seven years from the date of the gift, it becomes fully exempt from Inheritance Tax.

Taper relief only reduces tax owing on death, not tax paid at the time of the gift.

Example: A £500,000 gift to your daughter to buy a home — no IHT due if you live 7 years.

What is a CLT?

A Chargeable Lifetime Transfer (CLT) is a gift to most trusts (e.g. discretionary trusts), companies, or non-exempt recipients.

Here’s the key difference: if the value of the CLT exceeds the nil-rate band (currently £325,000), it could trigger an immediate 20% IHT charge — regardless of whether the donor lives or dies.

The below example assumes the nil rate band is fully available and not reduced by any CLTs made in the past 7 years.

Example: A £1m gift into a discretionary trust could incur a £135,000 tax bill immediately (£675,000 x 20%).

Why Use One Over the Other?

PETs are simple and efficient — but they come with loss of control. Once gifted, the recipient owns the asset.

CLTs involve more complexity and may create an immediate tax liability — but retain flexibility and control through trust structures.

For HNW individuals, this trade-off is important: PETs are cheaper, but CLTs can be safer from a governance and legacy perspective.

Conclusion

In the realm of inheritance tax (IHT) planning, understanding the nuances between Potentially Exempt Transfers (PETs) and Chargeable Lifetime Transfers (CLTs) is paramount for High-Net-Worth Individuals (HNWIs). PETs, typically gifts to individuals, offer a straightforward approach with no immediate tax implications, provided the donor survives seven years post-transfer. Conversely, CLTs, often involving transfers into trusts, may trigger an immediate 20% IHT charge on amounts exceeding the nil-rate band, regardless of the donor’s survival.

While PETs are advantageous for their simplicity and potential tax efficiency, they come with the caveat of relinquishing control over the gifted assets. CLTs, though potentially more complex and immediately taxable, allow for greater control through trust structures, which can be instrumental in long-term estate planning and asset protection.

Strategic use of both PETs and CLTs, tailored to individual circumstances and objectives, can significantly mitigate IHT liabilities and facilitate effective wealth transfer. However, it’s crucial to maintain meticulous records of all gifts and transfers, as HMRC requires detailed documentation to validate any claimed exemptions or reliefs.

If you would like to explore using PETs or CLTs effectively as part of your estate planning strategy, please contact your Finura Financial Planner here.

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Sources:
1. HMRC Inheritance Tax Manual – Potentially Exempt Transfers (PETs):
• Defines PETs, their conditions, and tax implications if the donor dies within seven years.
• https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04057
2. HMRC Inheritance Tax Manual – Chargeable Lifetime Transfers (CLTs):
• Explains CLTs, when they are immediately chargeable, and how they interact with the nil-rate band.
• https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14513
3. GOV.UK – Inheritance Tax Overview:
• Provides comprehensive information on IHT thresholds, rates, and exemptions.
• https://www.gov.uk/inheritance-tax
4. Price Bailey – Guide on Potentially Exempt Transfers (PETs):
• Offers an in-depth explanation of PETs, including their benefits and potential pitfalls.
• https://www.pricebailey.co.uk/guides/a-comprehensive-guide-on-potentially-exempt-transfers-pets/
5. Aberdeen Adviser Techzone – Discretionary Trusts:
• Explores the tax implications of discretionary trusts and their role in estate planning.
• https://techzone.aberdeenadviser.com/public/iht-est-plan/Tech-guide-Tax-of-discre-trust
6. GOV.UK – IHT100 Forms:
• Guidance on reporting lifetime gifts and transfers to HMRC using the appropriate forms.
• https://www.gov.uk/guidance/tell-hmrc-that-inheritance-tax-is-due-on-a-gift-or-trust-iht100

Date written: 27^th May 2025

Approved by Evolution Wealth Network Ltd on  03/06/2025.