How Does the 14-Year Rule for Inheritance Tax Work?
Most people are familiar with the inheritance tax (IHT) seven-year rule: If you make a gift and survive for seven years, that gift will usually fall outside of your estate for IHT purposes.
The 14-year rule sounds more complicated because it suggests that gifts can somehow remain relevant for twice as long.
They can, but only in a specific situation.
The key is to understand the difference between a potentially exempt transfer (PET) and a chargeable lifetime transfer (CLT).
When Can the 14-Year Rule Apply?
A common example is where someone:
Makes a gift into a discretionary trust, creating a CLT.
Later makes a gift directly to another person, creating a PET.
Dies within seven years of making that PET.
The later PET then becomes chargeable.
To calculate whether any IHT is due on it, we look at other chargeable transfers made in the seven years before that PET. This is where an older CLT can still matter.
Why Does a CLT Matter but an Earlier PET May Not?
This is the part that often causes confusion.
The nil-rate band is not really a pot that every gift permanently uses up. It is better thought of as a 0% tax band applied when calculating tax on chargeable transfers.
A CLT is chargeable from the moment it is made.
For example, if £200,000 is transferred into a discretionary trust, that is a chargeable transfer. There may be no tax to pay because the transfer falls within the £325,000 nil-rate band, but it is still part of the donor's history of chargeable transfers.
A PET is different. If £200,000 is gifted directly to a child, there is no IHT calculation when the gift is made. It only becomes chargeable if the donor dies within seven years. If the donor survives seven years, the PET becomes fully exempt. That means a successful PET never becomes part of the cumulative total of chargeable transfers.
This is the key distinction:
A CLT is chargeable from day one. A PET only becomes chargeable if the donor dies within seven years.
Another example above the nil-rate band may make this clearer. A £500,000 gift directly to a child is a PET, so there is no immediate IHT charge even though it exceeds the £325,000 nil-rate band. If the same £500,000 were transferred into a discretionary trust as a CLT, it would be tested against the nil-rate band immediately, leaving £175,000 chargeable to lifetime IHT at 20%.
A Simple Example to Explain the 14-Year Rule
Suppose:
Year 0: £200,000 is transferred into a discretionary trust.
Year 6: £300,000 is gifted directly to a child.
Year 12: The donor dies.
The £300,000 gift was made six years before death, so the PET fails and becomes chargeable.
We then look back seven years from the date of that PET.
The £200,000 trust transfer was made six years earlier and was a chargeable transfer, so it is included in the calculation.
Using a £325,000 nil-rate band:
Earlier CLT: £200,000
Nil-rate band: £325,000
Nil-rate band remaining for the PET: £125,000
Later PET: £300,000
Amount above the remaining nil-rate band and therefore taxable: £175,000
The trust gift was made 12 years before death, so it is not being brought back into the deceased's estate.
It matters only because it was a chargeable transfer within the seven years before the later PET and therefore affects the nil-rate band available for the later PET.
What If the Earlier Gift Had Been a PET?
Now change the example slightly:
Year 0: £200,000 is gifted directly to a child as a PET.
Year 6: A further £300,000 PET is made.
Year 12: The donor dies.
The first PET was made 12 years before death.
Because the donor survived more than seven years after making it, that PET became fully exempt.
It therefore does not form part of the cumulative total when calculating tax on the later failed PET. This is why an earlier PET cannot normally create the 14-year effect.
Why Is It Called the 14-Year Rule?
The name comes from two overlapping seven-year periods.
First, we look back up to seven years from death to identify gifts that have become chargeable.
Then, when calculating tax on one of those gifts, we may need to look back a further seven years from the date of that gift to identify any earlier chargeable transfers.
For example:
CLT → 6 years → PET → 6 years → death
The CLT is 12 years before death, but only six years before the failed PET.
It can therefore still affect how much nil-rate band is available when taxing that PET.
The Key Point
The 14-year rule does not mean that a gift stays in your estate for 14 years.
The earlier CLT may be completely outside of the estate by the time of death.
It matters because it was a chargeable transfer within the seven years before another transfer that later becomes chargeable.
The easiest way to remember it is:
A CLT is chargeable from day one, whereas a PET only becomes chargeable if the donor dies within seven years.
That difference is what allows an older CLT, but not a successful PET, to create the 14-year effect.