When families start planning for inheritance tax, they often ask a simple question that has a surprisingly complex answer: Should I make PETs first, or set up CLTs first?
Let's explain exactly how the order of your gifts can affect your inheritance tax bill — and why getting it wrong can create a 14‑year tax problem.
WHAT PETs AND CLTs ACTUALLY ARE ...
A PET, or Potentially Exempt Transfer, is a gift from one person to another. If you survive seven years, it becomes completely free of inheritance tax.
A CLT, or Chargeable Lifetime Transfer, is usually a gift into a discretionary trust. If the amount you put in exceeds the £325,000 nil‑rate band, there may be a 20% lifetime tax charge — and potentially another 20% if you die within seven years.
So PETs reduce your estate quickly. CLTs help you protect wealth inside trusts — but they come with more rules.
Why the order matters
The interaction between PETs, CLTs, the 7‑year rule, and the 14‑year rule creates two risks:
-
Failed PETs (death within 7 years)
-
Become CLTs retrospectively.
-
Pull earlier CLTs into the 7‑year cumulation.
-
Can trigger entry charges that were previously avoided.
-
Can reduce the nil‑rate band available to discretionary trusts at future 10‑year anniversaries.
-
CLTs made within 7 years before a failed PET
-
Are dragged back into the cumulative total.
-
This is how the timeline stretches to 14 years.
The 14‑Year Rule (explained simply)
A PET that fails (death within 7 years) becomes a CLT at the date of the original gift. HMRC then looks 7 years before that date to check for earlier CLTs.
So a PET made 6.5 years ago can “reach back” to CLTs made up to 13.5 years ago.
This is why the order of gifts matters.
See The 14‑year IHT trap: Absolute vs Discretionary Trusts
PETs vs CLTs: What happens if you do each first?
1. PETs first, then CLTs
Pros:
-
Reduces your estate immediately.
-
Starts the 7‑year clock sooner.
Cons:
-
If the PET fails, it becomes a CLT and uses up nil‑rate band that discretionary trusts rely on for future 10‑year charges.
-
Failed PETs can drag later CLTs into the cumulative total → 14‑year exposure.
-
The beneficiary of the PET may become liable for tax on the failed PET.
Best for:
-
Clients prioritising estate reduction over trust efficiency.
-
Simpler family gifting where trusts are secondary.
2. CLTs first, then PETs
Pros:
-
Protects the discretionary trust’s nil‑rate band.
-
Keeps CLTs “clean” and avoids them being dragged into a failed PET’s cumulation.
-
Reduces risk of future periodic and exit charges.
-
Aligns with Rysaffe planning (multiple trusts on different days).
Cons:
-
Estate reduction is slower because CLTs do not leave the estate until 7 years have passed.
-
Entry charges may apply if CLTs exceed the NRB.
Best for:
-
Clients using multiple discretionary trusts.
-
Wealth protection and generational planning.
-
Situations where periodic charges must be minimised.
See Rysaffe Ruling: Different-Day Trusts
Decision Table
A gifting diary is not optional—it is the only way to track:
-
PET dates
-
CLT dates
-
Annual exemptions
-
Cumulative totals
-
Whether a failed PET will drag earlier CLTs into the 14‑year window
-
Which spouse made which gift
Executors rely on this to calculate tax correctly.
See Gifting Diary: Gifting Diary
Key Risks to Note
-
Failed PETs can cause unexpected tax bills for the recipient.
-
CLTs made up to 14 years before death can become relevant.
-
Incorrect ordering can permanently reduce a trust’s nil‑rate band at every 10‑year anniversary.
-
Same‑day additions to multiple trusts are aggregated (FA 2014).
-
Different‑day trusts still each get their own NRB (Rysaffe).
Core takeaway
The correct order of PETs and CLTs depends entirely on your goal:
-
Goal: Protect trust NRBs → CLTs first
-
Goal: Reduce estate quickly → PETs first But the 14‑year rule means the order can dramatically affect future tax exposure.
Summary
If your priority is protecting discretionary trusts and avoiding future periodic charges, set up CLTs first. If your priority is reducing your estate quickly, make PETs first—but be aware of the 14‑year rule and the risk that failed PETs can erode trust nil‑rate bands.
Contact Book Tel/Vid Call Calculators Our Fees
