What is taper relief on inheritance tax and how does it work on gifts?

Full answer

Taper relief is one of the most misunderstood parts of UK inheritance tax (IHT). It applies to potentially exempt transfers (PETs) - usually outright gifts to individuals - where the donor dies within seven years. A gift made more than seven years before death is fully outside the estate. If death occurs within seven years, the gift becomes chargeable, but taper relief can cut the tax payable. The key trap: taper relief reduces the tax, not the value of the gift, and it only bites once total gifts in the seven years before death exceed the GBP 325,000 nil-rate band (NRB). Gifts are set against the NRB first in date order. If a gift sits wholly within the NRB, there is no tax to taper. The sliding scale of relief on the tax due is: 0-3 years 0% relief (full 40%), 3-4 years 20%, 4-5 years 40%, 5-6 years 60%, 6-7 years 80%, over 7 years no IHT. Worked example: someone gifts GBP 500,000 and dies 5 years later, having made no other gifts. The first GBP 325,000 is covered by the NRB. The remaining GBP 175,000 is taxable at 40% = GBP 70,000. Because death fell in the 5-6 year band, 60% taper relief applies, reducing the tax to GBP 28,000. Who it affects: anyone making large lifetime gifts as part of estate planning. Note the NRB (GBP 325,000) and Residence NRB (GBP 175,000) are unchanged for 2026/27. Taper relief never creates a refund and does not apply to the tax on the death estate itself. To model the overall position, use an inheritance tax calculator and consider professional advice for large estates.

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