How does inheritance tax taper relief work on gifts?

Full answer

Taper relief is one of the most commonly misunderstood aspects of UK Inheritance Tax planning, since many people assume it gradually reduces tax on ALL gifts made within seven years of death -- in reality, it only applies in a narrower set of circumstances. **The basic seven-year rule** Gifts made by an individual during their lifetime (beyond certain exempt gifts, like the £3,000 annual exemption) are "potentially exempt transfers" -- if the person survives seven years after making the gift, it falls entirely outside their estate for Inheritance Tax purposes. If they die within seven years, the gift may become chargeable, potentially adding to the value of their estate for IHT calculation purposes. **When taper relief actually applies** Crucially, taper relief only reduces the tax charged on a gift if the CUMULATIVE VALUE of gifts made (added together with the death estate, using the person's available Nil Rate Band first) exceeds the Nil Rate Band (£325,000 for 2026/27) -- if a gift, combined with other gifts and the Nil Rate Band allocation, falls entirely within the available Nil Rate Band, there is no Inheritance Tax to pay on it regardless of taper relief, since there was no tax charge to taper in the first place. **The taper relief sliding scale** For gifts that DO create a chargeable amount above the Nil Rate Band, taper relief reduces the tax rate applied based on how many complete years passed between the gift and death: less than 3 years, 40% (no relief); 3-4 years, 32% (20% relief); 4-5 years, 24% (40% relief); 5-6 years, 16% (60% relief); 6-7 years, 8% (80% relief); 7+ years, 0% (gift fully exempt, outside taper relief scope entirely since it's no longer chargeable at all). **A common misconception corrected** Many people believe making a gift and surviving, say, four years, means "40% of the tax is saved" on a moderate gift -- but if that gift falls within the available Nil Rate Band, there was never any tax due on it, so taper relief has nothing to reduce. Taper relief only becomes relevant for larger gifts (or gifts made when previous gifts have already used up the Nil Rate Band) that create a genuine IHT liability. **Worked example** Someone with no previous gifts makes a £525,000 gift to their child, then dies 5.5 years later. Using their £325,000 Nil Rate Band against the gift first, £200,000 of the gift is chargeable to Inheritance Tax. Without taper relief, this would be taxed at 40% = £80,000. Because death occurred in the 5-6 year band, taper relief provides 60% relief, reducing the effective rate to 16%, so the tax due is £32,000 instead of £80,000 -- a substantial saving, but only because the gift was large enough to exceed the Nil Rate Band in the first place. **Interaction with the residence nil rate band and other allowances** Taper relief calculations sit alongside (and after) other Inheritance Tax allowances and reliefs, including the Nil Rate Band, Residence Nil Rate Band (where applicable to the death estate itself, not typically to lifetime gifts), and any transferable unused Nil Rate Band from a deceased spouse -- the interaction of multiple gifts, allowances, and taper relief can get genuinely complex, particularly where several gifts were made at different times. **Why early, well-documented gifting still matters** Even though taper relief only helps with larger gifts, making gifts early (and living the full seven years) remains the most effective way to reduce a future Inheritance Tax bill for gifts of any size, since surviving the full period removes the gift from the estate calculation entirely -- taper relief is best understood as a partial consolation for gifts that fall just short of the full seven years, not the primary IHT planning tool itself. **Practical tip** Keep clear, dated records of significant gifts (amount, date, and recipient), since executors need this information to correctly calculate any Inheritance Tax due on the estate, including working out whether taper relief applies to any gifts made in the seven years before death.

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