Making financial Gifts during your lifetime can help reduce the impact Inheritance Tax (IHT) poses on your estate and maximise the wealth that your loved ones end up inheriting. However, with so much at stake, you want to ensure you are making the best decisions possible.
IHT, Gifts, taper relief, and taxing regulations can be difficult areas to navigate. In this guide, we’ll explore all you need to know about IHT taper relief and how you can use this sliding scale to your advantage.
What is IHT taper relief?
IHT taper relief explained in its simplest form is a tax reduction that applies to Gifts if a donor dies between three and seven years after making the transfer. To better understand taper relief for IHT, we must first look at the 7 year rule.
When you make a Gift of any value to an individual, this is known as a Potentially Exempt Transfer (PET). If the donor survives for seven years after making the Gift, the PET no longer forms part of their estate and, therefore, no IHT is due.
If the donor dies three years before making the Gift, the transfer is subjected to the full IHT rate of 40%.
However, if the donor’s death occurs between three and seven years after making the Gift, the value will be taxed on a sliding scale known as taper relief. If the donor dies within these timeframes, the PET becomes a Chargeable Lifetime Transfer (CLT).
To help illustrate this sliding scale, we’ve created an IHT taper relief table down below:
|Number of years between Gift and death||Rate of tax relief||Inheritance Tax Due|
|Less than 3||0%||40%|
|3 to 4||20%||32%|
|4 to 5||40%||24%|
|5 to 6||60%||16%|
|6 to 7||80%||8%|
|7 or more||100%||0%|
Who can benefit from taper relief?
Anyone who makes a Potentially Exempt Transfer can benefit from IHT taper relief rates.
To qualify for IHT PET taper relief, the Gift must sit outside the donor’s nil-rate band, which is a maximum of £325,000 for individuals or £650,000 if a transferable threshold applies.
However, taper relief only applies when the benefactor lives for an additional three years after making the Gift but dies before the seven-year threshold.
What to consider
There are a few considerations that you should take into account when evaluating IHT tapering relief. More specifically, you should consider that:
- You can only apply IHT taper relief on Gifts
- Taper relief is only applied to Gifts made in the last seven years if they surpass the personal IHT allowance or nil-rate band
- As of the 2022/23 tax year, the personal allowance for individuals is £325,000 or £650,000 if the allowance has been transferred by a spouse
- Gifts no longer form part of your estate or IHT taper relief HMRC calculations seven years after they were Gifted
- Gifts use up your IHT allowance in the chronological order they were made and before any assets or property in your estate are included
Gifts and exceptions
There are certain exceptions to the 7 year rule which are not subjected to tax, for example:
Gifts at weddings
You can make tax-free Gifts for wedding celebrations of up to £5,000 for children, £2,500 for grandchildren, or £1,000 for friends or relatives.
Transfers between spouses
Regardless of their value, Gifts between spouses or civil partners during a marriage are also exempt from Inheritance Tax.
Gifts that do not surpass £250 are not subjected to any Inheritance Tax. However, you cannot use another allowance on the same individual.
Each year, you receive a tax-free Gift allowance of £3,000 which, if unused, can be carried forward once to create a £6,000 allowance.
Child maintenance or education payments
Payments towards child maintenance or full-time education fees are not viewed as Gifts and, therefore, remain free of Inheritance Tax.
As long as your transfers do not affect your lifestyle, you can make tax-free Gifts to individuals from your surplus income. For example, birthday or Christmas presents.
Examples of taper relief
Let’s face it, understanding taper relief can be rather tricky at times. So, we’ve illustrated some examples down below to help understand how it all works.
- Mr Parker made a Gift of £50,000 to his daughter in February 2008
- He made an additional Gift of £100,000 to his daughter in March 2011
- He died in June of 2014 with an estate worth £100,000
Taper relief IHT: Mr Parker doesn’t need to pay Inheritance Tax nor any taper relief to apply as his total Gifts plus estate do not surpass his £350,000 nil-rate band.
Gift #1 of £50,000 + Gift #2 of £100,000 + £100,000 estate = £250,000
£350,000 (nil-rate band) - £250,000 (Gifts + estate) = £100,000 left over as part of his allowance.
- Mr Parker made a Gift of £200,000 to his daughter in January 2008
- He made an additional Gift of £200,000 to his daughter in January 2011
- He died in June of 2014 with an estate worth £200,000
Taper relief IHT: Mr Parker’s total amount of Gifts (£400,000) was over the personal allowance threshold. He died within 6 to 7 years of making the first Gift and within 3 to 4 years of making the second Gift.
The entirety of his IHT nil-rate band was used by his Gifts, which means the £75,000 of the Gift made in January 2011, as well as the £200,000 of his estate, are liable to IHT.
However, the second Gift that surpasses the IHT personal allowance was made within 3 to 4 years of his death.
This gives Mr Parker a tapered IHT relief of 20% which is payable by his daughter (the donee). Therefore, instead of paying a 40% IHT rate on £75,000, she must only pay 20%, reducing the entire tax bill from £30,000 to £24,000.
- Mrs Jones made a Gift of £360,000 to her son in February 2008
- She died in June of 2014 with no estate
Taper relief IHT: The Gift surpasses the £350,000 nil-rate band and it was made within 2 years of Mrs Jones’ death. Therefore, taper relief is not applicable, and the recipient must pay the full rate of IHT.
£360,000 (Gift) – £325,000 (nil-rate band) = £35,000 x 40% (rate of IHT on death) = £14,000 tax due.
IHT taper relief calculator
If you’re struggling to calculate how much Inheritance Tax is due, you can use the IHT taper relief calculator to better understand an estate’s finances.
Before you get started, you’ll need to know some basic information, such as:
- The value of the assets within the estate
- The ownership of the assets
- The total value of assets in component
- The outstanding value of debts and liabilities
- The value of Inheritance Tax relief
- The value of any charitable donations paid out
- The value of the individual’s nil-rate band
- The value of Gifts made in the 7 years before the individual’s death
Simply input your data into the calculator to see how much taper relief on IHT you can benefit from.
Hopefully, this guide has enriched your knowledge of IHT taper relief and the importance of estate planning before your time is due, which should not be understated, as making wise financial decisions whilst you are alive could result in thousands of pounds in savings.
If you still need further advice regarding IHT taper relief, Efficient Portfolio works with a wealth of professionals who will be able to advise you further. Contact us today.