How does taper relief really work?

Inheritance Tax (IHT) is a tax on the estate (the property, money, and possessions) of someone who has died.

While this tax can be significant, there are ways to mitigate its impact, one of which is through taper relief.

Taper relief is applicable to gifts made within seven years before the donor’s death and can reduce the amount of IHT payable.

It is designed to reduce the IHT due on gifts that exceed the nil-rate band (£325,000) when the donor dies within seven years of making the gift.

It is important to note that taper relief does not decrease the value of the gift itself but only the tax charged on it.

Eligibility for taper relief

Taper relief applies under specific conditions:

  • The gift must be outright – any gifts with reservations (where the donor retains some benefit) do not qualify.
  • The donor must survive for at least three years after making the gift.
  • The gift(s) value must exceed the donor’s available nil-rate band at the time of the gift.

The amount of relief is scaled based on how long the donor survives after making the gift, as follows:

  • Less than three years: 0 per cent relief
  • Three to four years: 20 per cent relief
  • Four to five years: 40 per cent relief
  • Five to six years: 60 per cent relief
  • Six to seven years: 80 per cent relief

If the donor survives for seven years or more, the gift is exempt from IHT altogether.

Impact of taper relief on IHT calculation

Taper relief is applied only to the amount of tax due on the gift.

For example, if a gift is made that exceeds the nil-rate band and the donor dies within three to four years, the tax payable on that gift will be reduced by 20 per cent.

This reduction is calculated on the tax rate applicable to the gift, not on the gift’s initial value.

To optimise the use of taper relief, it is crucial to plan when to make substantial gifts.

This planning should consider the donor’s health and the likelihood of surviving the requisite number of years.

It is also essential to keep detailed records of all gifts, including the date and value of each, to ensure they are correctly accounted for in the IHT calculation.

For help managing your taper relief, or any other aspect of estate planning, it’s always best to speak to a qualified accountant who can guide you on the financial and tax aspects of the issue.

For more information, please contact one of our team.