I have been going through a few areas of inheritance tax this week (just released M4:IHT for the AF1 exam course today), the headache known as the “14 year effect” cropped up (again!).

The basics of the 14 year rule

You probably already know what a lifetime gift is relative to the topic of Inheritance Tax (IHT) for the AF1 exam.
Such gifts are classed as Wholly Exempt Transfers (WETs), Potentially Exempt Transfers (PETs) or Chargeable Lifetime Transfers (CLTs).

With regard to the first two, no lifetime IHT will be chargeable. CLTs however, may attract inheritance tax both at the time they are made and on subsequent death, should this occur within seven years.

Lifetime gifts classed as Chargeable Lifetime Transfers will most commonly be placed into discretionary trusts or interest in possession trusts. IHT is payable at the lifetime rate (currently 20%) on any value in excess of the available nil rate band (NRB) of £325,000 for 2015/16, having taken into account the cumulative total of other CLTs made in the previous seven years. In other words, even though they are called chargeable lifetime transfers, no immediate Inheritance Tax liability arises in respect of gifts made by the donor that fall below the available NRB.

Lifetime gifts that are not Chargeable Lifetime Transfers or exempt from Inheritance Tax – i.e. outright gifts to other individuals or to a bare/absolute trust – are Potentially Exempt Transfers. These don’t suffer IHT at the time they are made and will be exempt altogether should the donor survive for seven years or more.

If death does occur within seven years of making a lifetime gift, Chargeable Lifetime Transfers and PETs become chargeable on death. Both types will be subject to IHT at 40% if their cumulative value exceeds the nil rate band, although credit is given for any previous tax paid (during the donor’s lifetime) and any eligibility for taper relief.

Assessing the cumulative value of the estate

The assessment should include all CLTs made in the seven years prior to each gift under review, the ‘cumulation’, and will reduce the available NRB. It should also account for PETs that were previously ignored but which have now become chargeable as a result of death occurring within seven years.

PETs made more than seven years before death can continue to be ignored but CLTs can’t. CLTs can therefore interact with each other or PETs to create a 14 year effect for Inheritance Tax purposes.

The following example should go some way towards explaining this effect:

14 Year Effect Example

Brian dies on 1 December 2015 leaving a chargeable estate of £700,000. In addition to making use of his annual Inheritance Tax allowances of £3,000, he had made the following gifts.

1 October 2006 he made a £200,000 CLT
1 September 2013 he made a £260,000 PET (failed)

What is the Inheritance Tax liability on Brian’s death?
There are a number of points to consider although the main one is that the two seven year periods for the CLT and the PET overlap (because the Potentially Exempt Transfer is made before the full seven year period for the CLT), which has a big effect on the IHT liability in this case:


  • Earliest gift made within seven years of death is the PET for £260,000.
  • The cumulation of CLTs in the seven years prior to the PET is £200,000.
  • The available NRB to offset against the PET is therefore reduced to £125,000 (£325,000 – £200,000).
  • IHT payable on the PET is £260,000 – £125,000 x 40% = £54,000.
  • No taper relief as PET was made within 3 years of death.


  • NRB on death is reduced by the ‘failed’ PET. £325,000 – £260,000 = £65,000.
  • CLT of £200,000 is ignored, as it is more than seven years before death.
  • IHT on the chargeable estate is £700,000 – £65,000 x 40% = £254,000.
  • The total IHT liability is therefore £54,000 + £254,000 = £308,000.

If Brian had delayed making the PET until 2 October 2013, it would still have been chargeable on his death but the CLT would have fallen out of his cumulation.

More questions and examples of IHT calculations like this can be found within our AF1 Personal Tax and Trust Planning course.

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