How does taper relief reduce Inheritance Tax on gifts?

Full answer

Taper relief is a commonly misunderstood element of Inheritance Tax gift planning -- many people believe it reduces the taxable VALUE of a gift the longer the donor survives, but it actually only reduces the RATE of tax charged, and only in specific circumstances. **The taper relief sliding scale** Where Inheritance Tax becomes due on a failed Potentially Exempt Transfer (because the donor died within seven years of making the gift), taper relief reduces the effective tax rate applied based on how many complete years passed between the gift and death: 0% relief (full 40% rate) for gifts made 0-3 years before death; 20% relief (reducing the rate to 32%) for gifts made 3-4 years before death; 40% relief (24% rate) for 4-5 years; 60% relief (16% rate) for 5-6 years; and 80% relief (8% rate) for gifts made 6-7 years before death. Once the donor survives the full seven years, the gift becomes completely exempt and falls outside the estate entirely. **The crucial catch -- it only applies above the nil rate band** Taper relief only ever reduces the tax rate on the PORTION of a gift's value that exceeds the deceased's available nil rate band (£325,000) at the time of death -- if a gift (or the cumulative total of gifts made in the seven years before death) falls entirely within the available nil rate band, there is no tax due on it at all, and therefore no taper relief is relevant or needed, since 0% tax is already being charged regardless of survival time. **Why this surprises many people** A common misconception is that surviving, say, five years after a gift automatically means 40% less tax is owed on that gift compared with dying immediately after making it -- but if the gift (combined with any earlier gifts) is fully covered by the available nil rate band, there was never any tax due on it in the first place, so taper relief provides no benefit at all in that situation. Taper relief only becomes valuable where a gift (or combination of gifts) is LARGE ENOUGH to exceed the nil rate band, meaning some tax would otherwise be due. **Worked example** Someone with a full £325,000 nil rate band available makes a single gift of £425,000 to their child, then dies five and a half years later. The gift exceeds the nil rate band by £100,000, so tax would normally be due on that £100,000 excess at 40% (£40,000) -- but because death occurred between five and six years after the gift, 60% taper relief applies, reducing the tax rate on that £100,000 excess to 16%, so the tax due becomes £16,000 instead of the full £40,000. **Order of gifts matters for which nil rate band portion applies** Where someone made several gifts in the seven years before death, they are considered in chronological order (earliest first) when working out how much of the nil rate band each gift uses up -- so an earlier, smaller gift might use up the whole nil rate band, leaving a LATER gift (even if made closer to death, and therefore theoretically qualifying for less taper relief) fully exposed to tax at whatever rate applies for its own specific timing. **Taper relief and chargeable lifetime transfers** A similar taper relief mechanism also applies to chargeable lifetime transfers (broadly, gifts into most types of trust) that become subject to additional tax because the donor dies within seven years, following the same sliding scale principle, though the underlying tax calculation for trusts involves some additional complexity. **Why this affects gifting strategy** Understanding that taper relief only helps once a gift exceeds the nil rate band means that for many families with more modest estates, simply relying on the annual exemptions and staying within the nil rate band for gifts is often more valuable and reliable than making a single very large gift and hoping to survive long enough for taper relief to reduce a potential tax bill. **Practical tip** If you're planning a large gift that's likely to exceed your available nil rate band, consider spreading gifts over multiple tax years to make use of annual exemptions, and factor taper relief into your planning only as a partial mitigation for the excess above the nil rate band -- not as a reason to assume a large gift becomes progressively "cheaper" from the very first pound given.

Try the calculator

More answers

• What is the seven year rule for gifts and inheritance tax?
• What is a Potentially Exempt Transfer for Inheritance Tax?