Potentially Exempt Transfers (PETs)

Key facts

A PET is a gift from an individual to another individual (or to a bare trust or disabled trust).
If the donor survives 7 years, the PET becomes fully exempt from IHT.
If the donor dies within 7 years, the PET is a chargeable transfer and uses up the nil-rate band.
Taper relief may reduce the IHT on a failed PET if the donor survived more than 3 years.
The recipient is primarily liable for any IHT due on a failed PET.

What Is a Potentially Exempt Transfer?

A potentially exempt transfer (PET) is a gift made by an individual to another individual during their lifetime. The key feature of a PET is that it is treated as exempt from IHT at the time it is made — but this exemption is conditional on the donor surviving for 7 years.^[1]

If the donor dies within 7 years of making the gift, the PET “fails” and becomes a chargeable transfer. It is then set against the donor’s nil-rate band and may trigger an IHT liability.^[2]

What Qualifies as a PET?

A transfer qualifies as a PET if it is made:^[2]

By an individual (not by a company, trust, or other entity)
To another individual
Or to a bare trust (an absolute trust for a named beneficiary)
Or to a trust for a disabled person

Transfers that are not PETs (and are instead chargeable lifetime transfers) include:

Gifts into discretionary trusts
Gifts into interest-in-possession trusts created after 22 March 2006
Transfers by companies or trustees

How PETs Work: The 7-Year Timeline

Scenario	IHT Consequence
Donor survives 7+ years	PET becomes fully exempt — no IHT
Donor dies within 3 years	PET is chargeable at the full death rate (40%)
Donor dies 3–7 years after	PET is chargeable but taper relief may reduce the tax

What Happens When a PET Fails?

If the donor dies within 7 years:^[1]

The PET becomes a chargeable transfer at its original value
It is added to the donor’s cumulative total of chargeable transfers (in chronological order)
The nil-rate band is applied to the earliest transfers first
Any excess above the NRB is charged at the death rate (40%), subject to taper relief if the gift was made 3–7 years before death

Example: David gives £400,000 to his daughter in June 2021. He dies in March 2026 (4 years and 9 months later). The PET fails. The first £325,000 is covered by the NRB (assuming no other transfers). The remaining £75,000 is taxable. Because David survived more than 3 but less than 5 years, taper relief reduces the IHT: £75,000 × 40% × 60% = £18,000.

How PETs Are Valued

The value of a PET is the loss to the donor’s estate at the time of the gift, not necessarily the market value of the asset given. For most outright gifts, these are the same. But if the donor gives away part of an asset, the loss to their estate may be greater than the market value of the part given away (because the retained part may also fall in value).^[3]

Record Keeping

Since PETs can become chargeable up to 7 years later, it is essential to keep good records of all gifts:

The date of each gift
The value of each gift
The recipient
Whether any exemptions apply (annual exemption, small gifts, etc.)

Tip: Keep a written record of all significant gifts, even if you expect to survive 7 years. If you die within 7 years, the personal representatives will need this information to complete the IHT400 accurately.

Frequently Asked Questions

What is a potentially exempt transfer?

A potentially exempt transfer (PET) is a gift made by an individual to another individual during their lifetime. It is “potentially” exempt because it will become fully exempt from IHT if the donor survives for 7 years after making the gift. If the donor dies within 7 years, the PET fails and becomes chargeable.

What gifts count as PETs?

PETs include outright gifts of cash, property, investments, or other assets from one individual to another. They also include gifts into bare trusts and trusts for disabled people. Gifts into discretionary trusts are not PETs — they are chargeable lifetime transfers (CLTs).

Who pays the IHT on a failed PET?

The primary liability falls on the person who received the gift. If they cannot pay, the personal representatives of the donor’s estate become liable. In practice, the IHT is often paid from the estate if the recipient does not have the means to pay.

Can I make unlimited PETs?

Yes. There is no limit on the number or value of PETs you can make. However, remember that PETs only become exempt after 7 years. If you die within 7 years, the PETs will use up your nil-rate band (and possibly trigger IHT on the gifts themselves).

Sources

Inheritance Tax: gifts — GOV.UK
IHTM14801 – Lifetime transfers: potentially exempt transfers — HMRC
Inheritance Tax Manual: IHTM04057 – Potentially exempt transfers — HMRC