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Advanced Planning8 min read

Chargeable Lifetime Transfers vs. PETs: Choosing the Right Gift

•By Rosewood Financial Planning

Large gifts to trusts are taxed up-front at 20%, but they can still beat the 40% bill later. Here's the maths.

Definitions

A PET is a gift to an individual, potentially exempt after 7 years. A CLT (e.g. gift to most trusts) is taxed immediately at 20% on the value above the NRB.

Bar chart comparing PET and CLT tax over time

Why pay 20% now?

If the donor survives 7 years, no further IHT applies and growth occurs outside the estate. For fast-growing assets the arithmetic favours a CLT despite the entry charge.

Worked example – £600k gift to discretionary trust

Assumptions: NRB £325k available; no RNRB or BPR/APR applied; donor survives 7 years (so no further IHT or taper relief); asset grows at 6% p.a. compounded for 10 years; 10-year/exit charges ignored for simplicity.
  • Immediate IHT (CLT entry charge): (£600k – £325k) × 20% = £55k
  • Asset growth calculation: £600k × (1.0610) ≈ £1.073m (£473k gain + £600k original)
  • If donor had kept asset in estate: total value £1.073m – £600k = £473k growth still inside estate
  • IHT on growth at 40% = £473k × 40% = £189k
Clock symbolising the seven-year survival period for gifts

Result: Entry tax of £55k vs. £189k tax if left in estate. Net saving ≈ £134k – but remember trustees face potential 10-year/exit charges and assumptions on growth may not hold.

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