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Taper Relief: a way to ease the tax burden of lifetime gifts made before the final curtain call

Inheritance tax (IHT) can be a significant concern for those planning their estates, but the UK tax system provides several mechanisms to mitigate this burden. One such mechanism is taper relief, which can reduce the tax payable on certain gifts made during a person’s lifetime.

What is Taper Relief?

Taper relief applies to gifts made within seven years before a person’s death. The relief reduces the amount of IHT due on these gifts (on a sliding scale), depending on how many years before death the gift was made. It is important to note that taper relief does not reduce the value of the gift itself, but rather the tax payable on it.

 

How Does Taper Relief Work?

To qualify for taper relief, a gift must be a Potentially Exempt Transfer (PET). A PET is any gift made more than seven years before the donor’s death, which due to the period of time that has passed from the date of gifting, is completely exempt from IHT. However, if the donor dies within seven years of making the gift, it becomes chargeable to IHT. This is where taper relief comes in.

The IHT on these gifts is reduced as follows:

  • Gifts made 3-4 years before death: 20% reduction.
  • Gifts made 4-5 years before death: 40% reduction.
  • Gifts made 5-6 years before death: 60% reduction.
  • Gifts made 6-7 years before death: 80% reduction.


Example 1: Understanding the Basics

Let’s say Billy gives his niece £400,000, and he dies five years later. Here’s how taper relief would work:

  1. Determine the chargeable amount: The IHT threshold (nil-rate band) is currently £325,000. The chargeable amount is the gift minus the IHT threshold: £400,000 – £325,000 = £75,000.
  2. Calculate IHT without taper relief: The IHT rate is 40%, so the tax would be 40% of £75,000 = £30,000.
  3. Apply taper relief: Since Billy died 5 years after making the gift, a 60% reduction in tax applies. The taxable amount is reduced to 40% of £30,000, which is £12,000. The relief is therefore £18,000.


Example 2: Multiple Gifts

Let’s assume the following:

  • The IHT threshold (nil-rate band) is £325,000.
  • The inheritance tax rate is 40%.
  • The donor, Bobby, makes the following gifts:
    • £325,000 to his daughter 6 years before his death.
    • £150,000 to his son 4 years before his death.
    • £300,000 to his friend 2 years before his death.


Step-by-Step Calculation

First Gift: £325,000 (6 years before death)

  1. Determine if it’s within the nil-rate band: This is the first gift, so it initially uses the nil-rate band.
  2. Chargeable amount: £325,000 (within the nil-rate band, so initially no tax).
  3. Apply taper relief: Bobby died 6 years after making this gift, so 80% taper relief applies. However, since the gift is within the nil-rate band, no IHT is due.


Second Gift: £150,000 (4 years before death)

  1. Determine if it’s within the nil-rate band: The nil-rate band remaining after the first gift is £325,000 – £325,000 = £0.
  2. Chargeable amount: The second gift of £150,000 exceeds the remaining nil-rate band by £150,000.
  3. Calculate IHT: The excess amount is £150,000 taxed at the full rate of 40% = £60,000.
  4. Apply taper relief: Since Bobby died 4 years after making this gift, a 40% taper relief applies. The revised tax due is 60% of £60,000 = £36,000. (The relief is £24,000).


Third Gift: £300,000 (2 years before death)

  1. Determine if it’s within the nil-rate band: The nil-rate band has already been used up on the first gift.
  2. Chargeable amount: The full £300,000 is subject to IHT.
  3. Calculate IHT: Since this gift was made within 3 years of death, no taper relief applies. The tax is the full 40% of £300,000 = £120,000.


Summary of IHT Due

  • First Gift: £0 (no tax due as it was within the nil-rate band (had the value of the gift exceeded the nil-rate band threshold, 80% taper relief would have been applied).
  • Second Gift: £36,000 (after 40% taper relief).
  • Third Gift: £120,000 (no taper relief applied as it was within 3 years of death)


Total Inheritance Tax Due

The total IHT due on the gifts is: £156,000 (£0 + £36,000 + £120,000).

 

In this example, Bobby made three significant gifts within seven years of his death. The first gift benefited from the full nil-rate band resulting in no tax. The second gift had no nil rate band benefit as all had been used on the first gift within 7 years but was partially reduced by taper relief. The third gift, made within 3 years of death, did not qualify for any taper relief and was fully taxable.

This illustrates how taper relief can significantly reduce the inheritance tax burden on gifts made during one’s lifetime (in our example, a saving of £24,000), encouraging people to consider gifting assets well before their death. By understanding the timelines and how relief applies, individuals can better plan their estates to minimise tax liabilities.

 

Whether you are planning your estate or managing the affairs of a deceased loved one, it is wise to seek expert advice. DMH Stallard can help you to navigate the complexities of inheritance tax and taper relief in the most efficient way. If you would like any further information or assistance, please contact us.

About the authors


about the author img

Michael Derrick

Partner

Expert advisor on estate administration, will drafting, inheritance tax planning and Lasting Power of Attorney.

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