How does IHT taper relief work on gifts made within 7 years of death in the UK?

Full answer

Inheritance Tax (IHT) is normally charged at 40% on assets above the Nil Rate Band (NRB) of GBP 325,000. Gifts made during your lifetime are usually Potentially Exempt Transfers (PETs) -- they become fully exempt from IHT if you survive 7 years after making them. If you die within 7 years, the gift is brought back into your estate for IHT purposes, but taper relief may reduce the tax payable. How taper relief works Taper relief applies to the tax charge on PETs that fall within 3 to 7 years of death. The relief reduces the rate of IHT (not the value of the gift) as follows: -- 0 to 3 years before death: 40% (full IHT rate, no taper) -- 3 to 4 years: 32% (20% reduction) -- 4 to 5 years: 24% (40% reduction) -- 5 to 6 years: 16% (60% reduction) -- 6 to 7 years: 8% (80% reduction) -- Over 7 years: 0% (fully exempt) Critical point: taper only applies above the NRB Taper relief only reduces the IHT charge on the portion of the gift that exceeds the NRB (GBP 325,000 in 2026/27). It does not reduce the value counted against the NRB itself. Gifts are assessed in chronological order. If earlier gifts have already used up the NRB, a later gift may face the full reduced rate (e.g., 32% at 3-4 years). If the NRB has not been used, the gift sits within it and no IHT applies regardless -- making taper irrelevant in those cases. Example You give GBP 500,000 to your child and die 4.5 years later, having made no prior gifts. Your NRB is GBP 325,000. The first GBP 325,000 of the gift is covered by the NRB (no tax). The remaining GBP 175,000 is chargeable. The gift was made 4 to 5 years before death, so the reduced rate is 24%. Tax = GBP 175,000 x 24% = GBP 42,000 (versus GBP 70,000 at the full 40% rate). Annual exemptions and other exclusions Before applying taper, consider annual exemptions (GBP 3,000 per year, plus one prior year if unused), small gifts exemption (GBP 250 per person), and gifts out of normal expenditure from income. These reduce the chargeable value of the gift before taper is considered. Gifts with reservation If you give away an asset but continue to benefit from it (e.g., you give your house to your children but live there rent-free), it is a gift with reservation of benefit and remains in your estate. Taper relief does not help in these cases.

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