Inheritance Tax Planning and the 14-Year Rule

We are all familiar with the 7-year rule for making effective lifetime gifts for Inheritance Tax planning, and some of us may also be aware of the 14-year rule, but how many remember how it works? This article examines the impact on an Inheritance Tax liability when this rule is applied – useful for CII R03, R06, AF1 and AF5 exam revision.

This article is correct as at 16 June 2026 and is relevant to examinable tax year 2025/26.

We know how a Potentially Exempt Transfer (PET) works: make a PET, live 7 years, and it’s exempt for IHT purposes.  Make a PET, die within 7 years, and it’s in your estate for IHT purposes and will use up part of the Nil-Rate Band (NRB) (or all, if it’s a large enough gift).  (Remember to deduct the £3,000 annual allowances if they are available).

But, if someone has made a series of gifts, then each gift is looked at and assessed against its own 7-year period to work out how much NRB is available to offset against it.

So if a chargeable lifetime transfer (CLT) has been made (usually by making a transfer into a trust – other than a bare trust or a trust for a vulnerable person) up to 14 years before the settlor’s death, this could have an impact on the IHT liability on a PET that fails.

Year 1

CLT is made.
This is potentially chargeable at 20% if the settlor has no NRB available, but let’s assume no other CLTs have been made in the previous 7 years, so a full NRB is available and the CLT made today is within this amount.

Year 6

PET is made (no immediate tax charge as it’s potentially exempt)

Year 12

Death occurs.
The CLT made in Year 1 was made more than 7 years prior to death, so isn’t subject to IHT in itself and is not included in the estate.
However, the PET has failed due to it being made 6 years before death, so when working out the tax due on the PET, the CLT made in the 7 years prior to it has to be taken into account and does therefore affect the amount of IHT due on the PET.

Let’s look at a practical example

In August 2016, Stan makes a transfer to a discretionary trust (CLT) of £250,000.

This is his first gift so we can deduct £3,000 as an annual exemption for this tax year and for the previous tax year as it can be carried forward one year.  This reduces the value of the CLT to £244,000.  As £244,000 is within the NRB, there was no IHT payable on the CLT.

In August 2021 Stan makes a PET to his daughter of £300,000.  Again, we can deduct two lots of annual exemption, reducing the value of the PET to £294,000.  As the gift is potentially exempt, no IHT is payable at the time it was made.

Stan dies in September 2026.  The PET in 2021 has now failed as it was made within 7 years prior to Stan’s death.  To calculate the IHT on the PET we have to include the CLT as this was made in the 7 years prior to August 2021.

• CLT in August 2016 = £244,000
• £325,000 (NRB) – £244,000 = £81,000 of the NRB remains
• PET in August 2021 = £294,000
• £294,000 – £81,000 (remaining NRB) = £213,000 above the NRB
• £213,000 x IHT @ 40% = £85,200
• Taper relief applies as Stan dies between 5 and 6 years after making the PET
• £85,200 x 40% = £34,080
• £34,080 is due on the PET with the daughter primarily liable.

Summing Up

In summary, a CLT will impact the NRB available to subsequent PETs if death occurs within 7 years of the PET and 14 years of the CLT, so if there’s any possibility of clients making both CLTs and PETs, it’s important to be aware of the 14-year rule and if they can, it’s often better to make the PET before the CLT, particularly if they can leave a good gap between them.

Grab the resources you need!

Inheritance Tax questions often come down to applying the rules correctly and avoiding small but costly errors. Get access to our free R03 E-Mocks taster to see how these topics are tested in an exam-style format and preview the question style, layout, and level of detail included in the full set.

Alternatively, you can download the taster for AF1, AF5, or R06 if any of those exams is on the horizon for you.