Technical Note: Is a Donation to a Foundation a PET or a Chargeable Lifetime Transfer for a UK Founder?

1. Introduction

When a UK‑resident founder transfers assets to a civil‑law foundation during lifetime, advisers frequently ask:

Is the transfer a Potentially Exempt Transfer (PET), or a Chargeable Lifetime Transfer (CLT)?

The answer is not intuitive. It depends entirely on how the foundation is characterised for UK inheritance tax (IHT) purposes — a classification that is fact‑sensitive and often misunderstood.

This article sets out the correct statutory framework, the HMRC position, and the practical consequences.

2. The Basic IHT Framework

Under the Inheritance Tax Act 1984 (IHTA 1984), lifetime transfers by individuals fall into two statutory categories:

• Potentially Exempt Transfers (PETs) — IHTA 1984 s.3A

• Chargeable Transfers — IHTA 1984 s.2

A subset of chargeable transfers are immediately chargeable lifetime transfers (CLTs), which attract the 20% lifetime rate under s.7(2) and s.64.

Understanding the classification determines:

• Whether a 20% lifetime charge applies

• Whether the seven‑year rule applies

• Whether the transfer is aggregated with earlier transfers

• Whether the donor’s death within seven years brings the value back into charge

3. What Is a PET?

A Potentially Exempt Transfer arises only where:

1. The donor makes a lifetime gift to another individual, and

2. The transfer is not immediately chargeable (IHTA 1984 s.3A(1)).

If the donor survives seven years, the transfer becomes fully exempt. If the donor dies within seven years, the value is brought back into the death estate (s.3A(4)).

Key statutory point: A PET must be a gift to an individual. No other donee qualifies.

This is a frequent source of error in cross‑border planning.

4. Is a Foundation an “Individual” for IHT Purposes?

No.

A foundation is a separate legal person. For UK tax purposes, HMRC typically treats a foreign foundation as either:

• A body corporate, or

• A settlement (IHTA 1984 s.43; HMRC IHTM 42100+)

It is not an individual. Therefore:

A transfer by a UK‑resident founder to a foundation cannot be a PET under s.3A.

This remains true even if the founder retains no benefit and even if the foundation is philanthropic.

5. If It Is Not a PET, Is It a Chargeable Lifetime Transfer?

Yes — but the consequences depend on classification.

A transfer to a foundation is always a transfer of value (IHTA 1984 s.3), and therefore a chargeable transfer (s.2).

However, whether it is immediately chargeable depends on whether the foundation is treated as:

• A body corporate, or

• A settlement (i.e., a relevant property trust)

6. Scenario A — Foundation Treated as a Body Corporate

This is HMRC’s default starting point for many civil‑law foundations.

Tax Consequences

• The transfer is a chargeable transfer, but

• It is not an immediately chargeable lifetime transfer under s.64, because s.64 applies only to transfers into settlements.

Therefore:

• No 20% lifetime IHT charge arises at the time of transfer

• The transfer becomes chargeable only if the donor dies within seven years (s.7)

• If the donor survives seven years, the transfer falls out of account

This outcome resembles a PET in practical effect, but:

It is not a PET, and the statutory basis is entirely different.

This distinction matters for anti‑avoidance rules, aggregation, and reporting.

7. Scenario B — Foundation Treated as a Settlement

Where the foundation’s structure, governance, or founder’s powers cause it to fall within the definition of a settlement (IHTA 1984 s.43), HMRC may treat it as analogous to a relevant property trust.

HMRC guidance: IHTM 42100–42110.

Indicators of settlement treatment

• Founder retains dispositive powers (power to add/remove beneficiaries, vary purposes)

• Beneficiaries have discretionary interests

• Council/board acts similarly to trustees

• Founder retains effective control (de facto or de jure)

Tax Consequences

If treated as a settlement:

• The transfer is an immediately chargeable lifetime transfer (CLT)

• The 20% lifetime rate applies above the available nil‑rate band (s.7(2), s.64)

• Periodic and exit charges may later apply (ss.64–68)

This aligns the foundation with the UK treatment of discretionary trusts.

8. The Retained Benefit Problem (GWR and POAT)

Even if no lifetime charge arises, advisers must consider:

Gifts With Reservation of Benefit (GWR)

(IHTA 1984 ss.102–102C; HMRC IHTM 14301+)

A transfer is treated as remaining in the donor’s estate if the donor:

• Retains the ability to benefit

• Retains enjoyment of the property

• Retains control amounting to enjoyment

GWR applies regardless of whether the transfer was a PET, CLT, or other chargeable transfer.

Pre‑Owned Assets Tax (POAT)

(Finance Act 2004 Sch. 15)

If GWR does not apply but the donor continues to enjoy the property, POAT may impose an annual income tax charge.

This is a common trap with foundations where the founder retains influence but not formal benefit.

9. Later Donations and Aggregation

Each subsequent transfer to the foundation:

• Is analysed separately

• Has its own seven‑year clock

• May be aggregated with earlier transfers under s.7(3) if within seven years

There is no special treatment simply because the foundation already exists.

10. Domicile Considerations

This article assumes the founder is UK‑domiciled or deemed domiciled.

For non‑UK‑domiciled founders:

• Only UK‑situs assets are within scope (s.6)

• Foreign assets may be excluded property (s.6(1), s.48)

• Foundation classification still matters, but the exposure may be limited

This is a major planning point in cross‑border structuring.

11. Practical Summary

For a UK‑resident (and UK‑domiciled) founder:

• A transfer to a foundation cannot be a PET (s.3A).

• It is always a chargeable transfer (s.2).

• If the foundation is treated as a body corporate, no immediate 20% charge arises.

• If treated as a settlement, the transfer is an immediately chargeable lifetime transfer (s.64).

• The seven‑year rule applies in most corporate‑classification cases.

• GWR and POAT can override the analysis entirely.

• Classification depends on structure, control, and HMRC interpretation at the time.

12. Conclusion

The question “Is a donation to a foundation a PET?” is understandable but legally inaccurate.

The correct question is:

How will the foundation be characterised for UK IHT purposes?

In most cases, the transfer is a chargeable transfer with seven‑year consequences, but not a PET. Whether an immediate lifetime charge applies depends entirely on whether the foundation is treated as a corporate body or a settlement.

As in all cross‑border planning, classification precedes consequence.

References & Authorities Cited

Statutes

• Inheritance Tax Act 1984:

  • s.2 (Chargeable transfers)

  • s.3 (Transfer of value)

  • s.3A (Potentially exempt transfers)

  • s.6 (Excluded property and situs rules)

  • s.7 (Charge on death; aggregation)

  • s.43 (Definition of settlement)

  • s.48 (Excluded property: foreign property)

  • ss.64–68 (Lifetime charges on transfers into settlements)

  • ss.102–102C (Gifts with reservation of benefit)

• Finance Act 2004:

  • Schedule 15 (Pre‑Owned Assets Tax)

• Finance Act 2006:

  • Schedule 20 (Tainted settlements)

HMRC Manuals

• IHTM 04000+ (Transfers of value)

• IHTM 14301+ (Gifts with reservation)

• IHTM 42100–42110 (Foreign foundations and settlements)

• IHTM 42200+ (Relevant property regime)

• IHTM 44000+ (Excluded property)