Definition
A Chargeable Lifetime Transfer (CLT) is a gift made during your lifetime—typically into a trust—that triggers an immediate inheritance tax charge of 20% on amounts exceeding £325,000.
Unlike gifts to individuals, CLTs are taxed immediately rather than becoming potentially exempt after seven years. This makes them a powerful estate planning tool for those prioritizing control and asset protection over immediate tax savings.
What Does Chargeable Lifetime Transfer Mean?
Under the Inheritance Tax Act 1984, Section 3(1), any lifetime transfer that doesn't qualify as a Potentially Exempt Transfer (PET) becomes immediately chargeable to inheritance tax. The most common CLTs involve transferring assets into discretionary trusts, gifts to companies, or most interest in possession trusts created after 22 March 2006. While gifts directly to individuals become tax-free if you survive seven years, CLTs trigger an immediate 20% tax charge on amounts exceeding the £325,000 nil rate band—half the 40% death rate.
The tax calculation considers all CLTs made in the previous seven years. James transfers £400,000 into a discretionary trust for his grandchildren, having made no previous CLTs. The first £325,000 falls within his nil rate band, so inheritance tax of 20% applies only to £75,000, creating a £15,000 tax bill. The transferor is primarily liable for this tax under IHTA 1984, Section 226(1), though trustees and donors can agree who actually pays.
When the donor pays the tax rather than the trustees, the gift must be "grossed up" at 100/80 (multiplied by 1.25) to calculate the true taxable value. David wants his trust to receive exactly £400,000 and agrees to pay the tax himself. After covering £325,000 with his nil rate band, the remaining £75,000 must be grossed up to £93,750 (£75,000 × 1.25), resulting in £18,750 tax—£3,750 more than if trustees had paid. This reflects that when donors pay, they're transferring both the gift and the tax from their estate.
Strategic planning matters significantly. Sarah made a £200,000 CLT three years ago and now wants to transfer another £300,000. Her available nil rate band is only £125,000 (£325,000 minus the previous £200,000 CLT still within the seven-year cumulation period). She faces 20% tax on £175,000, totalling £35,000. The seven-year cumulation rule means previous CLTs reduce the nil rate band available for subsequent transfers, making timing crucial for tax efficiency.
If you die within seven years of making a CLT, additional tax may be due. The transfer is recalculated at the 40% death rate, with credit given for the 20% already paid. However, unlike PETs—which become completely exempt after seven years—CLTs never become exempt. The initial 20% tax remains payable regardless of survival. Surviving seven years simply means no additional death charge applies.
Strategic gift ordering also matters. Emma plans to give £250,000 to a discretionary trust and £200,000 directly to her children. Making the CLT first locks in her nil rate band allocation for that transfer before making the PETs. If she died within seven years and had made the PETs first, those failed PETs would reduce the nil rate band available for ongoing trust charges (10-year anniversaries), increasing lifetime trust taxation. Professional sequencing advice is essential.
Common Questions
"I want to set up a trust for my grandchildren with £400,000—will I have to pay inheritance tax immediately?" Yes. Transferring £400,000 into a discretionary trust is a CLT. You'll pay 20% inheritance tax on the amount over £325,000 (the nil rate band), resulting in an immediate £15,000 tax charge. Additional tax may be due if you die within seven years, recalculated at the 40% death rate.
"What's the difference between gifting money to my daughter directly and putting it in a trust for her?" Gifting money directly to your daughter is a Potentially Exempt Transfer (PET), which becomes completely tax-free if you survive seven years. Putting money into a trust is typically a CLT, triggering immediate 20% tax on amounts over £325,000. The trade-off is that trusts offer control, asset protection, and flexibility that direct gifts don't provide.
"If I put £300,000 in a trust now and want to add another £200,000 in five years, will the second gift be taxed?" Yes. CLTs are cumulative over seven years. Your first £300,000 CLT used most of your £325,000 nil rate band. When you make the second £200,000 CLT, only £25,000 of nil rate band remains available, so you'll pay 20% tax on £175,000, totalling £35,000. Strategic timing of CLTs matters significantly.
Common Misconceptions
Myth: If I survive seven years after making a Chargeable Lifetime Transfer, the initial 20% tax I paid will be refunded and the gift becomes tax-free like other lifetime gifts.
Reality: This is incorrect. Unlike Potentially Exempt Transfers (PETs) which become completely exempt after seven years, CLTs never become exempt. The initial 20% tax you paid remains payable regardless of how long you live. If you die within seven years, additional tax may be due as the gift is recalculated at the 40% death rate (with credit for the 20% already paid). This fundamental difference causes widespread confusion because both involve the seven-year rule, but it works completely differently for each transfer type.
Myth: I can avoid the immediate tax charge on a Chargeable Lifetime Transfer by keeping my gift under the £3,000 annual exemption.
Reality: While the £3,000 annual exemption can reduce the value of a CLT, it rarely eliminates the tax charge because most CLTs involve substantial amounts going into trusts for asset protection or family planning. If you transfer £350,000 into a discretionary trust and deduct the £3,000 annual exemption, you still have £347,000 subject to CLT rules. You'd pay 20% tax on £22,000 (£347,000 minus £325,000 nil rate band), resulting in a £4,400 tax bill. The annual exemption helps but doesn't convert a CLT into a PET or eliminate the charge for substantial trust transfers.
Related Terms
Understanding Chargeable Lifetime Transfers connects to these related concepts:
- Potentially Exempt Transfer: The contrasting gift type for direct gifts to individuals, which becomes tax-free after seven years unlike CLTs which remain taxable.
- Discretionary Trust: The most common recipient of CLTs, where trustees have discretion over distributions among beneficiaries.
- Inheritance Tax: The broader tax framework within which CLTs operate, including the 20% lifetime rate versus 40% death rate.
- Trust: The legal structure that typically triggers CLT treatment when receiving lifetime gifts.
- Lifetime Gift: The broader category of estate planning transfers, with CLTs being one specific type alongside PETs and exempt gifts.
Related Articles
- Understanding UK Inheritance Tax: Provides essential context for how CLTs fit into the broader inheritance tax framework, including nil rate bands and lifetime versus death rates.
- Estate Planning Strategies: Explains when and why CLTs are used despite immediate tax charges, covering asset protection and control considerations.
- Trust-Based Estate Planning: Explores different trust structures and their tax implications, explaining which trusts trigger CLT treatment.
- Strategic Lifetime Gifting: Covers optimal gift sequencing, including why making CLTs before PETs can improve tax efficiency.
Need Help with Your Will?
While wills themselves don't create Chargeable Lifetime Transfers, sophisticated estate planning often combines both. Understanding CLTs helps you make informed decisions about trust-based planning alongside your will.
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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal advice. Chargeable Lifetime Transfers involve complex tax calculations and immediate financial consequences. For advice specific to your situation, consult a qualified solicitor and tax adviser before making substantial gifts into trusts.