A Potentially Exempt Transfer is a gift you make during your lifetime.
It is called “potentially exempt” because —
if you survive for seven years after making it —
it falls outside your estate entirely.
No inheritance tax. No reduction in your nil-rate band.
The gift becomes fully exempt.
But if you pass away within those seven years —
the gift may still be counted as part of your estate.
And inheritance tax may be due.
An important distinction
Taper relief applies to the tax payable on the gift — not to the value of the gift itself. The full value of the gift is always used when calculating whether inheritance tax is due. Taper relief simply reduces the rate of tax applied, depending on how many years have passed since the gift was made.
Why this matters in legacy planning
Many people give gifts during their lifetime —
to children, to grandchildren, to loved ones.
Sometimes large gifts. A deposit for a house.
A lump sum to help with a business. A share of savings.
These gifts are generous. They are well-meant.
But without understanding the 7-year rule —
they can create an unexpected tax liability.
Not for you — but for the people you were trying to help.
Understanding PETs means understanding timing.
It means planning gifts with awareness —
so that generosity does not become a burden.
Taper Relief — the 7-year rule
Years since the gift was made — and the rate of tax applied if the donor passes away within that period.
The chart above shows how the rate of inheritance tax reduces over time.
In the first year — the full 40% rate applies.
By year five — just 8%.
After seven years — the gift is entirely free of tax.
This is why timing matters.
And why understanding the rule can change how you plan.
In summary
A Potentially Exempt Transfer is any lifetime gift that exceeds your annual exemptions. If you survive seven years, it leaves your estate completely. If you do not, taper relief may reduce the tax — but not eliminate it.
PETs are not something to fear. They are something to understand — so that you can give generously, plan wisely, and protect the people you love from unexpected liabilities.
Want to understand how PETs fit into your wider plan?
Get in touch