Glossary · Tax
Potentially exempt transfer
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Definition: An outright lifetime gift to an individual that leaves your estate immediately, becomes fully exempt after 7 years, and is taxable if you die within that time.
Most lifetime gifts to individuals are PETs. They aren't reported to HMRC at the time of the gift. If the donor survives 7 years they are fully outside the estate.
If the donor dies within 7 years, the gift is added back to the estate. It uses up the nil-rate band in chronological order. Tax on any excess can be reduced by taper relief from year 3 onwards.
Gifts into most trusts are 'chargeable lifetime transfers' (CLTs), not PETs — they have an immediate 20% IHT charge on the excess over the nil-rate band.
Primary source: gov.uk/inheritance-tax/gifts