How the 14-Year-Rule for Lifetime Gifts Works

We’ve all heard of the 14-Year Rule for Lifetime Gifts, but how many know (remember?) how it works? This article examines the impact on inheritance tax liability when this rule is being applied – useful for CII R03, R06, AF1 and AF5 exam revision.

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 big enough).  (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 disabled person) up to 14 years before a settlor’s death, this could have an impact on the IHT liability of a PET that later fails.

Year 1

Chargeable transfer is made.
This is potentially chargeable at 20% if no NRB is available, but let’s assume chargeable transfers have not been made in the previous 7 years, so a full NRB is available and the chargeable transfer made today is within this.

Year 6

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

Year 12

Death occurs.
The chargeable transfer made in Year 1 is made more than 7 years prior to death, so isn’t subject to IHT in itself.

However, when working out the tax due on the PET, which has become chargeable due to being made 6 years before death, the CLT made in the 7 years prior to it has to be taken into account and so does affect the amount of IHT payable.  (The estate is calculated ignoring the CLT, just taking into account the PET as normal).

Summing Up

In summary, a chargeable transfer will impact the NRB available to subsequent PETs if death occurs within seven years of the PET and 14 years of the chargeable transfer, 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 in particular if they can leave a good gap between them.

Grab the resources you need!

If you’re studying for your CII R03 exam, and you’re wondering how you’ll ever manage to pass, grab our free taster to try out one of Brand Financial Training’s mock exam papers for yourself.  Click the link to download the R03 mock exam taster now!

Alternatively, you can download the taster for AF1, AF5, or R06 if any of those exams is causing you to worry.