The seven-year rule is a well-known part of inheritance tax (IHT) planning. If you make a gift and survive the following seven years, the gift will become free of your estate for IHT purposes.

However, there is a catch. If you die within seven years, other gifts that were made within the previous seven years could also be subject to IHT. Making a chargeable lifetime transfer (CLT) up to 14 years before your death could result in a liability on a later failed potentially exempt transfer (PET) or second CLT because the first was made within the seven-year period before the later gift.

A PET is usually made outright to someone and is not subject to any immediate IHT. On the other hand, a CLT is usually made through the creation of a trust, which could be subject to IHT if the amount transferred exceeds your available nil rate band. The nil rate band in this instance is the current nil rate band reduced by the other CLTs you make in the seven years before creating the trust (PETs are ignored for this purpose).

If you die within seven years of making a PET or CLT, IHT is charged. When determining the available nil rate band to set a series of gifts against, it’s important to look at all chargeable transfers that came before each gift. This means taking note of all transfers made over the past 14 years, including any failed PETs.

Paula Steele, managing partner at John Lamb Financial Planning, says: “Clients should be made aware of the repercussions of the ‘14-year rule’ before they make a series of lifetime gifts. They should consider taking out life cover to protect against any future potential IHT liability.”