If a person makes a gift in their lifetime, this may have inheritance tax (IHT) implications. The gift may be exempt from IHT if, for example, it falls within the category of an exemption, such as the £3,000 annual gift allowance that we all have.
The gift may be chargeable to IHT immediately if, for example, it is a gift into a discretionary trust. Such a gift, or settlement, is referred to as a chargeable lifetime transfer (CLT).
The gift may be treated as exempt from IHT when made, but may become chargeable if the person making the gift dies within seven years of making it. Equally, should the person making the gift survive seven years, the gift becomes fully exempt. This type of gift (typically made directly to an individual or a bare trust) is a potentially exempt transfer (PET).