Taper relief – a commonly misunderstood inheritance tax relief

by Kirsty Royds-Jones, Knill James Tax Manager

If you make an outright gift of cash or an asset to a person, then you must survive for seven years from the date of making the gift for it to be completely free of inheritance tax (IHT).

So, what happens if you do not make that seven-year milestone? Well, the gifts you made in the seven-year period before you passed away are now chargeable to inheritance tax. However, there may be some exemptions and reliefs available to minimise any inheritance tax exposure.

Firstly, if you have not already used your nil rate band of £325,000, then this will be offset against the gifts that you have made in the seven years before you passed away, starting with the earliest gift first. So, if the gifts you have made total less than £325,000, then no inheritance tax is payable on these gifts.

But what if you have already used your nil rate band, or the gifts you made in the previous seven years exceed £325,000? This is when taper relief comes into play!

Taper relief reduces the rate of tax applied to the gifts you made in the seven years before you passed away that are not covered by your nil rate band. There is no reduction if the gift was made within three years of your death. The rates are as follows:

It is worth noting that if inheritance tax is payable on gifts made by you in the seven years before you pass away, then this tax is payable by the recipient of the gift.

Let's look at an example

Mary passed away on 28 February 2024. She made the following gifts during her lifetime after relief for annual inheritance tax exemptions:

Unfortunately, all these gifts occurred within seven years of Mary's death, so we need to look at the inheritance tax position of each gift starting with the earliest gift first.

Gift of £325,000 to Elizabeth on 30/06/2017

Mary's nil rate band of £325,000 is available and so this will automatically be offset against this gift resulting in no inheritance tax payable by Elizabeth.

Gift of £325,000 to Robert on 31/08/2018

Mary's nil rate band has been fully utilised against her gift to Elizabeth on 30 June 2017. Five and a half years have passed since this gift was made to Robert and Mary passed away. Therefore, a rate of 16% is applied resulting in an inheritance tax liability of £52,000 (325,000 * 16%) payable by Robert to HMRC.

Gift of £5,000 to Elizabeth on 31/01/2020

Just over four years have passed since this gift was made to Elizabeth and Mary passed away. A rate of 24% is therefore applied to this gift. This creates an inheritance tax liability of £1,200 (5,000*24%) payable by Elizabeth to HMRC.

Gift of £5,000 to Robert on 31/05/2022

This gift occurred within three years of Mary's death, therefore taper relief is not applicable and the full rate of inheritance tax of 40% is applied to this gift. Robert therefore has inheritance tax to pay to HMRC of £2,000.

Here to help

Would you like advice on lifetime gifting and inheritance tax planning or do you need assistance with probate? If so, please get in touch with us on 01273 480480 or email Kirsty Royds-Jones on kirstyr@knilljames.co.uk and she or one of our tax team's experts will be pleased to help.