Chargeable Lifetime Transfer (CLT): 20% Rate and Seven-Year Rule

A chargeable lifetime transfer is a gift you make during your lifetime that triggers an immediate UK inheritance tax charge, most commonly when you move assets into a discretionary trust. The tax is charged at 20% on the value above your available £325,000 nil rate band. That 20% is not always the end of it: if you die within seven years, HMRC recalculates the tax at the 40% death rate, and the trustees may owe the difference.¹

What Counts as a Chargeable Lifetime Transfer

Every lifetime gift that is neither exempt nor a potentially exempt transfer (PET) is a chargeable lifetime transfer. The distinction turns on where the gift goes. A gift straight to another individual is a PET and escapes inheritance tax entirely if you survive seven years. A gift into a discretionary trust does not get that treatment. Because the beneficiaries have no automatic right to the income or capital, the wealth has moved permanently out of your estate into a structure HMRC treats as a separate taxable entity, and tax is charged immediately.²

Discretionary trusts generate most of these transfers, but they are not the only vehicle. Interest-in-possession trusts created on or after 22 March 2006 are generally treated as relevant property trusts, so transfers into them are also chargeable at the point of the gift. Pre-2006 interests were handled differently, but any new lifetime interest-in-possession trust set up today falls into the same category as a discretionary trust for these rules.³

How the Gift Is Valued

HMRC does not simply take the market value of what you handed over. The chargeable amount is the “loss to your estate”: the difference between what your estate was worth before the gift and what it is worth after. Where your remaining assets drop in value as a consequence of the gift, that fall counts.⁴

Shares in a private company are the classic illustration. Say you own 60 out of 100 issued shares, giving you control, and you transfer 20 shares into a trust. On their own, those 20 shares would sell as a minority parcel and would not be worth much. But the loss to your estate is far larger, because you have moved from a controlling holding of 60 shares down to a minority holding of 40. The chargeable value is that much bigger difference, not the standalone price of the 20 shares. A similar effect appears with a half-share of a property: the whole might be worth £200,000, but a half-share on the open market sells at a discount, so the loss to your estate is greater than half the whole.

For land, buildings, unlisted shares, or business interests, you will usually need a formal valuation dated at the day of the transfer. HMRC will scrutinise anything that looks low.

Exemptions You Can Deduct First

Before any tax is worked out, you strip out the value of any exemptions you can use. They come off the transfer pound for pound, so it is worth applying them before the nil rate band even enters the picture.

Annual exemption of £3,000 per tax year, with one year’s unused allowance carried forward for a maximum of £6,000.
Small gifts of up to £250 per recipient per tax year, provided you have not used another exemption on that person.
Wedding or civil partnership gifts: up to £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else.
Normal expenditure out of income: regular gifts from your after-tax income, unlimited in amount, so long as you can still maintain your usual standard of living.
Gifts between UK-domiciled spouses or civil partners: fully exempt, no cap.
Gifts to qualifying charities and registered political parties: fully exempt.

A £330,000 transfer into a trust drops to a £324,000 chargeable transfer once you apply £3,000 for the current year and £3,000 carried forward. That amount sits entirely inside the nil rate band and no immediate tax is due.⁵

The 20% Lifetime Rate and the Nil Rate Band

The lifetime rate is 20%, exactly half the 40% death rate. Anything within the £325,000 nil rate band is taxed at 0%. The band is frozen at £325,000 until at least April 2030.⁶

How much of that band you actually have depends on what chargeable transfers you have already made in the previous seven years. Each earlier transfer eats into it. If you settled £200,000 on a trust four years ago, only £125,000 of the band remains for a new transfer today, and anything above that is taxed at 20%.⁷

Where the trustees pay the tax out of the trust fund, the arithmetic is straightforward. A £425,000 transfer, with the full nil rate band available, leaves £100,000 chargeable, so tax is £20,000. The trustees take it from the trust and the calculation ends there.

Grossing Up When the Donor Pays

If you pay the tax yourself rather than letting the trustees cover it out of the gifted assets, HMRC treats your payment as an additional gift to the trust: the trust still receives the full amount, and you have parted with the tax on top. To reflect this, HMRC “grosses up” the transfer, which effectively lifts the rate to 25% of the net gift.⁸

The maths follows from the 20% lifetime rate. If the gross transfer is the net gift divided by 0.80, the tax works out to 25% of the net. On £100,000 of net gift above the nil rate band, the grossed-up value is £125,000 and the tax is £25,000. Had the trustees paid, the tax would have been £20,000. The gap widens with the size of the gift, so it pays to decide who bears the tax before the transfer is made.

If You Die Within Seven Years

The 20% charge at the time of the gift is provisional in one important sense. If you die within seven years, HMRC recalculates the tax at the full 40% death rate. If the recalculated figure is higher than what was paid at 20%, the trustees owe the balance. If it is lower, no refund is given.¹

Taper relief cuts the additional charge once you have survived more than three years:

0 to 3 years: no relief, full 40% rate.
3 to 4 years: 80% of the full rate, effective 32%.
4 to 5 years: 60% of the full rate, effective 24%.
5 to 6 years: 60% reduction, effective 16%.
6 to 7 years: 80% reduction, effective 8%.
More than 7 years: no further tax; the original 20% is the total liability.

Two limits on taper relief are worth pinning down. It reduces the rate, not the chargeable value. And the transfer still counts as cumulation against your nil rate band for any later transfers and for your estate at death. A chargeable transfer made six years before your death may attract very little additional tax of its own, yet it still occupies band that would otherwise have sheltered other assets from the 40% rate.⁷

Ongoing Trust Charges to Expect

The initial charge is not the trust’s only exposure to inheritance tax. Relevant property trusts face two recurring charges for as long as they hold assets.

Every 10 years from the date the trust was set up, HMRC applies a periodic charge on the net value of the relevant property, capped at a maximum effective rate of 6%. The actual rate depends on a calculation that pulls in the settlor’s cumulative transfers and the trust’s own history, and it usually needs professional handling.⁹

When assets leave the trust between anniversaries, an exit charge applies, also capped at 6% and scaled to how much of the 10-year period has run. The earlier a distribution happens after the trust’s creation or its last 10-year anniversary, the smaller the proportional charge.

Reporting and Paying the Tax

You report a chargeable lifetime transfer on form IHT100, with schedule IHT100a for a transfer into a trust. The return needs the date of the transfer, the market value of the assets on that date, and a description of what was given. Difficult-to-value items such as property, unlisted shares, or business interests should be supported by a professional valuation.¹⁰

You also need a full record of every chargeable transfer you have made in the previous seven years, with dates, values, and any tax paid. That history sets how much of the nil rate band remains and drives the whole calculation.

The deadline for both filing and paying is six months after the end of the month in which the chargeable event took place. Interest runs on any unpaid tax from that point. As of January 2026, the late-payment rate on inheritance tax is 7.75% a year, so a payment initiated on the final day and cleared a few days later can easily attract a charge. Building a few working days of buffer into the transfer is the simplest protection.⁶

1
Legislation.gov.uk. Inheritance Tax Act 1984 – Section 7
2
GOV.UK. Inheritance Tax Manual – IHTM04057 – Lifetime Transfers: What Is a Potentially Exempt Transfer
3
HM Revenue & Customs. Inheritance Tax Manual – IHTM16061 – Interests in Possession: Finance Act 2006 and the New Trust Regime
4
HM Revenue & Customs. Inheritance Tax Manual – IHTM04055 – Lifetime Transfers: Loss to Estate Greater Than the Value
5
GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances – Rules on Giving Gifts
6
GOV.UK. Inheritance Tax Thresholds and Interest Rates
7
GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
8
HM Revenue & Customs. Inheritance Tax Manual – IHTM26122 – Step 4 – Grossing Up: How Grossing Up Works
9
GOV.UK. Trusts and Inheritance Tax
10
GOV.UK. Tell HMRC That Inheritance Tax Is Due on a Gift or Trust (IHT100)