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Understanding PETs for Inheritance Tax: Say Goodbye to Tax on Lifetime Gifts

For many individuals planning their estate, the concept of Potentially Exempt Transfers (PETs) offers a straightforward and highly effective way to reduce future inheritance tax (IHT) liabilities — provided the timing is right.

In this post, we explain what a PET is, when it applies, and how to make use of it in real-world scenarios.

What Is a PET?

A Potentially Exempt Transfer (PET) is a type of lifetime gift made by an individual that, if certain conditions are met, becomes completely exempt from inheritance tax.

To qualify:

  • The gift must be made to another individual or to a qualifying trust.
  • It must not be immediately chargeable to IHT at the time it’s made.
  • Most importantly, the donor must survive for seven years after making the gift.

If all these are satisfied, the gift becomes fully exempt from IHT — as if it never existed for tax purposes.

How the 7-Year Rule Works

Once a PET is made, it becomes potentially exempt — but only actually exempt if the donor lives for at least seven years after the date of the gift.

If the donor passes away within seven years, the gift re-enters the estate and may be taxed, depending on its value and the donor’s remaining nil-rate band.

Example:

Sarah gifts her son £300,000 in May 2025.

  • If she survives to May 2032, there is no inheritance tax due on the gift.
  • If she passes away in 2029, and hasn’t made other gifts using her nil-rate band (£325,000 as of now), no tax will be due, but the gift will reduce the available nil-rate band for the rest of the estate.

Taper Relief: Reducing the IHT Bill

If the donor dies between 3 and 7 years after making a PET, taper relief may reduce the tax payable on the gift.

Years Between Gift and Death % of Full IHT Payable
0–3 100%
3–4 80%
4–5 60%
5–6 40%
6–7 20%
7+ 0% (Fully Exempt)

🔍 Important: Taper relief only applies if the value of the gift exceeds the nil-rate band and results in tax being due.

What Doesn’t Count as a PET?

Not all gifts qualify.

  • Gifts to companies (e.g., your limited company) are not PETs.
  • Gifts into most trusts, like discretionary trusts, are immediately chargeable.
  • Indirect gifts, such as paying someone’s bills, school fees, or medical expenses directly, usually do not qualify as PETs.

Example:

  • If Grandma pays her grandson’s university fees directly, it does not qualify as a PET.
  • If she gives the money to her daughter to pay the fees, that does qualify, as the money enters the daughter’s estate.

How to Structure a Valid PET

To make a valid PET:

 Gift directly to an individual (e.g., via bank transfer).
 Make a record of the date and amount.
 Avoid conditions or agreements (e.g., asking for repayment).
 Don’t retain control or benefit over the asset once gifted.

What Happens If the Donor Dies Within 7 Years?

If the donor passes away within 7 years of making the PET:

  • The value of the PET is added back to their estate.
  • If the total value of gifts and the estate exceed the nil-rate band, inheritance tax will apply.
  • Taper relief may reduce the tax, as shown above.

How PETs Can Support Estate Planning

PETs are one of the most flexible and accessible inheritance tax planning tools available.

They are particularly helpful when:

  • You want to help your children or grandchildren financially now.
  • You wish to gradually reduce your estate to avoid later IHT charges.
  • You’re healthy and confident you’ll survive the 7-year window.

Other Exemptions to Consider

Alongside PETs, other exemptions may help reduce IHT liabilities, including:

  • Annual Exemption: You can give away up to £3,000 each tax year (plus any unused from the previous year) without triggering IHT.
  • Small Gifts Exemption: Gifts up to £250 per recipient per tax year.
  • Gifts out of Income: If regular gifts can be shown to come from surplus income (not capital), they may be exempt.

You can read more on HMRC’s IHT gifts guidance here.

Case Study: A Family Gift

John, aged 67, gifts £100,000 to each of his two daughters in 2025. He survives until 2033.

  • The gifts qualify as PETs.
  • No inheritance tax is due.
  • His estate is £200,000 smaller, saving his heirs up to £80,000 in potential IHT (assuming 40% rate and nil-rate band fully used).

Conclusion: Say Goodbye to IHT on Lifetime Gifts

The PET rules provide a golden opportunity to pass wealth down the generations free of inheritance tax — but timing and structure are everything.

You need to plan ahead, track your gifts, and be aware of the implications if your circumstances change. It’s not just about giving — it’s about giving smart.

 Let Merranti Help You Plan Ahead

Are you thinking of gifting to your children, helping with property deposits, or reducing your IHT exposure?

We can help you:

 Maximise inheritance tax savings
 Structure gifts effectively
 Maintain HMRC-compliant records
 Combine PETs with other reliefs for tax-efficient estate planning

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