A Potentially Exempt Transfer (PET) is the legal term HMRC uses for a lifetime gift that has the potential to be completely free of Inheritance Tax — but only if the person making the gift survives for at least seven years after the transfer. Understanding how PETs work is the foundation of any serious IHT planning strategy.
What Makes a Transfer "Potentially Exempt"?
The word 'potentially' is key. When you make a gift — whether of cash, property, or other assets — it does not immediately become tax-free. Instead, it enters a seven-year probationary period. During this time, the gift is classified as a PET: it has the potential to be exempt, but HMRC retains the right to include it in your estate if you die before the seven years are up.
When Does the Seven-Year Clock Start?
The clock starts on the date the gift is legally completed — not when you discuss it, sign a letter of intent, or instruct a solicitor. For property, this means the date the title deeds are registered in the recipient's name at HM Land Registry. For cash, it is the date the funds are transferred. The earlier you start the clock, the sooner the gift becomes fully exempt.
There is no maximum lifetime limit on gifting in England and Wales. You can make as many PETs as you choose, for any amount. The only constraint is the seven-year survival requirement. This makes early, planned gifting the most powerful IHT reduction tool available.
What Happens If You Die Within Seven Years?
If you die within seven years of making a PET, the value of the gift is added back into your estate for IHT purposes. It will first consume your nil-rate band (£325,000). Any amount exceeding the nil-rate band is taxed at 40% — or at a reduced rate if taper relief applies (for deaths between years three and seven). This is why the timing of gifts matters so much.
PETs vs the Annual Exemption
PETs are separate from the annual £3,000 exemption. The annual exemption allows you to gift up to £3,000 per tax year without triggering the seven-year clock at all — it is immediately exempt. PETs cover larger gifts where the seven-year rule applies. Both can be used simultaneously as part of a comprehensive gifting strategy.