When you die, if qualifying assets in your estate are worth more than £325,000 (known as the “nil rate band”), Inheritance Tax (IHT) will be due on any amount over that figure. However, there are reliefs and exemptions that can be applied to either reduce or eliminate the IHT liability. One of these is taper relief which is available in certain circumstances relating to gifts. We receive regular requests from clients asking, “How does taper relief work?”.

What is IHT taper relief?

There is no IHT due on gifts if the donor survives for seven years after making the gift. If the donor fails to survive the seven years, IHT at the full rate of 40% may become due, especially if it is above or where there is a limited amount of nil rate band available. Taper relief is available depending on how many of the seven years were survived. After three years, the amount of IHT due “tapers” down until, after year seven, no IHT is due.

The following rates apply following the date of the gift:

Number of years between date of gift and death	Tax due
0 – 3 years	40%
3 – 4 years	32%
4 – 5 years	24%
5 – 6 years	16%
6 – 7 years	8%
7 years or more	0%

 

There are certain conditions applying to IHT taper relief that must be observed. These are:

• • The total value of any gifts made within the 7 years prior to death must exceed £325,000 (the IHT threshold or nil rate band).
    
    
  • The relief only applies to gifts.
    
    
  • Taper relief reduces the IHT payable on the proportion of the gift over the IHT threshold.
    
    
  • Gifts made within 7 years of death are counted first for IHT – before the value of other assets is counted. This is important to note especially if the value of your estate at the date of death (excluding gifts) is below the IHT threshold.
    
    
  • Gifts with reservation of benefit (where the donor retains some benefit from the gift despite giving it away, such as gifting a property but continuing to live in it rent free) do not qualify for taper relief, and the value of such gifts will still be fully counted for IHT purposes.

How does it work in practice?

If you are considering making gifts during your lifetime, especially with an eye to estate planning, it is important to carefully record the dates and amounts of the gifts you make. Perhaps the best way to understand IHT taper relief is by working through some examples, using 15 October 2022 as today's date.

Example one

Mr McGregor dies in April 2022.

In September 2014, he gifted £150,000 to his eldest daughter, Jean.

In May 2017, Mr McGregor gifted £100,000 to his son James.

When Mr McGregor died, his estate was valued at £200,000.

The gift to Jean was made 7 years before Mr McGregor’s death which means it is excluded from the IHT calculations - it has "fallen out" of his estate for IHT purposes. As the gift to James was made within 7 years of Mr McGregor’s death, it is added back into the value of his estate at the date of death. This means his date of death estate value amounts to £300,000 which is below the IHT threshold. This means there is no IHT payable in this example.

Example two

Mr McGregor dies in April 2022.

In August 2016, he gifted £150,000 to his eldest daughter, Jean.

In May 2017, Mr McGregor gifted £100,000 to his son James.

When Mr McGregor died, his estate was valued at £200,000.

In this example, the total gifts Mr McGregor made within seven years of his death amounted to £250,000 - these are both added to his death estate for IHT purposes but are themselves below the IHT threshold (and would need to be over this limit for them to qualify for taper relief). However, because they form part of his estate on death, his allowance of £325,000 is reduced by their value first, leaving only £75,000 of the allowance available. When he died, Mr McGregor had £200,000 in his estate so, from that, we can deduct the balance of his available allowance of £75,000. That means his estate will pay IHT at 40% on the balance of £125,000. The amount of Inheritance Tax payable will amount to £50,000.

Example three

Mr McGregor dies in April 2022.

In August 2016, he gifted £250,000 to his eldest daughter, Jean.

In May 2017, Mr McGregor gifted £150,000 to his son James.

When Mr McGregor died, his estate was valued at £200,000.

The total amount gifted by Mr McGregor within seven years of his death was £400,000. This is more than the IHT threshold of £325,000 meaning that the amount over (£75,000) is liable to inheritance tax as well as the value of Mr McGregor’s estate at the time of his death. In this situation, the recipient of the gift, James, is responsible for the Inheritance Tax due on his gift.

However, the gift will qualify for taper relief as James received his gift between years 4 and 5 before Mr McGregor’s death. That means he is due to pay IHT on the balance over the IHT threshold (£75,000) at 24%. The amount of Inheritance Tax James will pay is £18,000.

Mr McGregor’s estate has an IHT liability on the full £200,000 remaining at the time of his death as there is no nil rate band left. This is payable at 40% which means the IHT due on his estate is £80,000.

Using gifts combined with IHT taper relief can be an effective way to mitigate the amount of Inheritance Tax payable on death. However, as can be seen from the examples above, it is not quite as straight forward as popular opinion would suggest. After all, you cannot predict when your last seven years may be.

You should also be aware that there are other allowances available to help reduce your IHT liability if used on a regular basis. If you are considering gifting part of your wealth to others and would like to discuss the Inheritance Tax implications, or options using other allowances available, then please get in touch.

Specialist Estate Planning Solicitors, Murray Beith Murray, Edinburgh

Partner, Peter Shand heads our Asset Protection Group and specialises in estate planning and tax. If this article has raised any questions or you would like to discuss your affairs, then please complete our contact form or call us on 0131 225 1200.

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