WETs, PETs and CLTs: Part 4

This final installment on the WETs, PETs and CLTs blog series will look at the interaction between a failed PET (when the donor dies within 7 years of gifting), and any chargeable lifetime transfers preceding such PET which may impact the PET, as well as possibly the estate.

We know that when a PET fails, it is liable for IHT at 40%, reduced (potentially) by taper relief. This is the well-known principle of the 7 year rule.

What is less commonly known, is the 14 year rule and how gifts made 14 years (13 years and 364 days to be precise), can still be taken into account upon death.

If a PET fails, then the HMRC will look back 7 years prior to the date of gift, to see if any chargable lifetime transfers were made in this period. If so, then available NRB for the PET would be reduced by the CLT, even if no CLT payment was made at the time of the gift.

As is often the case, this concept is best explained by means of an example. Lets assume Mr. Smith made a gift into a discretionary trust of £250,000 in 2017. In February 2021 he made an outright gift to his son, once again for an amount of £250,000. Unfortunately, Mr. Smith passed away in March 2025 and hence the PET has failed. IHT would be payable.

Usually, the NRB for Mr. Smith can be used to offset the PET gift amount, resulting in £75,000 remaining for his estate (£325,000 - £250,000), and hence no IHT would be payable on the gift. However, because he made an earlier CLT (within 7 years of the PET), the available NRB for the PET would not be dictated by Mr. Smith's NRB upon death, but rather then remaining NRB at the time of the PET.

The available NRB at the time of the second gift would have been reduced by the value of the CLT (£250,000). This means that the PET only had an available NRB of £75,000 and because the value of the gift was in excess of the available NRB, an IHT levy is payable. £250,000 - £75,000 = £175,000 above the available NRB. 40% IHT would equate to £70,000. However, because Mr. Smith lived for more than 4 years after the PET (but less than 5 years), taper relief would reduce the IHT liability by 40%, resulting in 60% of the £70,000 payable (£42,000). This would be payable by the recipient of the gift, in this instance, his son.

Furthermore, the NRB for his estate would be reduced by the cumulation of all failed PET's, and CLT's made in the 7 year period before his death. In this case, the only PET within this period (7 years) is the gift to his son (£250,000). This means that he only has £75,000 of his NRB to offset against his estate (assuming he did not inherit any NRB from a previous spouse/civil partner). Of course, there are numerous permutations of this "problem". What if there were numerous PETs made in the 7 years before death. What if the CLT was also within 7 years of death? Howabout if the PET failed, and there was another PET before this which was within the 14 year window, but which did not fail in its own right? All of these variations will have an impact into the calculation of any IHT liability.

The 14 year rule is not commonly known, but as one can see, it can have huge impacts to the IHT payable. This highlights the importance of obtaining regulated financial advice, from a specialist in the trusts and taxation sphere of financial planning.