Making use of inheritance tax gift exemptions

Normally when an individual known as the donor makes an outright gift to another individual this is known as a potentially exempt transfer (PET) for inheritance tax purposes. The gift is only ‘potentially’ exempt because there may be inheritance tax to pay on the value of the gift if the donor does not survive it by seven years – and to the extent that any other exemptions do not apply.

If an individual makes a lifetime gift to a trust this is known as a lifetime chargeable transfer. This is because the gift is immediately chargeable to inheritance tax at a rate of 20% to the extent that the value of the transfer into trust exceeds the donor’s available nil rate band (NRB) which is frozen at £325 000 until April 2026.

In addition to the lifetime chargeable transfer most lifetime trusts...