There are three main types of gift for IHT purposes. Those that are exempt, those that are potentially exempt (potentially exempt transfer or PET) and chargeable lifetime transfers (CLT).

CLTs are chargeable to a maximum of half the death rate (ie 20%) when the value is transferred. Where the settlor dies within seven years, additional IHT will be due.

PETs are not subject to IHT at the time of the transfer of value, but will become chargeable if the settlor dies within seven years of making the transfer.

Exempt transfers are immediately exempt and are not subject to the seven-year PET rule or ‘entry charge’ of 20% as with CLTs.

When creating PETs and CLTs as part of any IHT planning exercise with a clean gifts history, creating CLTs before PETs will usually help to minimise any possible future IHT tax.

However, where gifts have been made over time, when calculating what nil-rate band (NRB) is available on death, and whether additional tax is due on previous ‘gifts’, the calculation can require information from as far as 14 years previously, not seven years.

For more information please see article 'Making gifts – order of gifting’.

Scenario 1 – no gifts history
John Jones – dies 1 January 2010 – NRB £325,000 2009/10
John has made no IHT transfers previously and has an estate of £525,000 (assuming annual exemptions of £3,000 already used)
£525,000 - £325,000 NRB = £200,000 x 40% = £80,000 tax

Scenario 2 – gifts history
John Jones – dies 1 January 2010 – NRB £325,000 2009/10
John had made a CLT of £150,000 on 3 January 1996 and a PET of £213,000 on 2 January 2003.

The calculation would be as follows:

The need to consider previous transfers should not deter individuals from making gifts, but where there are multiple gifts over an extended period, identifying the possibility of unexpected tax on the gifts as well as a reduction of the available nil-rate band is important should death occur within seven years.