Inheritance Tax Taper Relief: Full Worked Example 2026/27
A precise worked example of how Inheritance Tax taper relief reduces tax on a lifetime gift made 3 to 7 years before death in 2026/27, and why it rarely helps as much as people expect.
The core mechanism, precisely
Taper relief applies when someone makes a lifetime gift that would otherwise be a potentially exempt transfer (PET), but dies within seven years of making it, causing the gift to become chargeable to Inheritance Tax after all. Taper relief then reduces the rate of tax applied to the chargeable portion of the gift, on a sliding scale based on how many complete years passed between the gift and death — it does not reduce the size of the gift itself when calculating how much of the nil rate band it uses up.
The taper relief scale is:
| Years between gift and death | Reduction applied to the tax rate |
|---|---|
| 0 – 3 years | 0% (full 40% rate) |
| 3 – 4 years | 20% |
| 4 – 5 years | 40% |
| 5 – 6 years | 60% |
| 6 – 7 years | 80% |
| 7+ years | Fully exempt |
Full worked example
Scenario: In March 2021, Alan gives his daughter £525,000 in cash. Alan dies in August 2026, five years and five months after the gift — so between the 5-year and 6-year taper bands.
Step 1 — establish the nil rate band available. Assume Alan made no other gifts in the seven years before this one, so his full nil rate band of £325,000 is available to set against it.
Step 2 — work out the chargeable excess. £525,000 (gift) − £325,000 (nil rate band) = £200,000 chargeable excess.
Step 3 — apply the standard 40% rate to the excess. £200,000 × 40% = £80,000 (the tax that would be due with no taper relief).
Step 4 — apply taper relief. Because Alan survived between 5 and 6 full years, the 60% taper relief reduction applies. £80,000 × 60% = £48,000 reduction. Tax due after taper relief = £80,000 − £48,000 = £32,000.
So the final Inheritance Tax bill on this gift, after taper relief, is £32,000 — payable primarily by Alan's daughter as recipient of the gift, rather than by Alan's estate directly (though HMRC can pursue the estate if she cannot pay).
Why taper relief disappoints so many people
A very common misunderstanding is assuming that surviving, say, five years after a gift means the gift itself is "60% exempt" or "60% smaller" for tax purposes. It is not — the whole £525,000 gift still counts against the nil rate band in full when working out how much of the band is used up. Taper relief only ever touches the tax rate on the excess above the nil rate band, which is why, in the worked example, a full 60% taper relief reduction still left a £32,000 tax bill, not something close to zero.
This also means taper relief provides no benefit at all for a gift that is fully covered by the nil rate band. If Alan had instead given his daughter £300,000 (under the £325,000 nil rate band), there would be no chargeable excess regardless of how many years he survived, so the taper relief percentage would simply never come into play — there is no tax to apply a reduction to.
Practical planning implications
Because taper relief only meaningfully helps with gifts that comfortably exceed the available nil rate band, and only kicks in after 3 full years, it works best as a planning tool for:
- Larger gifts, well above the nil rate band, where a genuine reduction in the tax rate on the excess produces a worthwhile cash saving.
- Situations where the donor is realistically likely to survive at least 3-4 years, since anything within that window gets no benefit at all.
For gifts that are modest relative to the nil rate band, or for donors in poor health who may not survive even 3 years, taper relief is largely irrelevant, and other planning tools — such as decreasing term life insurance in trust to cover the potential tax liability during the exposure window — are often more useful than relying on taper relief to reduce the eventual bill.
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Open Inheritance Tax calculatorFrequently asked questions
What is Inheritance Tax taper relief?
Taper relief reduces the rate of Inheritance Tax charged on a lifetime gift that becomes chargeable because the donor died within seven years of making it, on a sliding scale depending on how many complete years passed between the gift and death, ranging from a 20% reduction after 3 years to an 80% reduction after 6 years.
Does taper relief reduce the value of the gift for Inheritance Tax purposes?
No. This is the single most common misunderstanding. Taper relief only reduces the rate of tax charged on the portion of a gift that exceeds the available nil rate band — it does not reduce the amount of the gift counted against the estate, and gifts fully covered by the nil rate band get no benefit from taper relief at all, because there is no tax to taper.
When does taper relief start to apply?
Taper relief only starts to provide any reduction once at least 3 full years have passed between the gift and the date of death. Gifts made within 3 years of death get no taper relief reduction at all and are taxed at the full 40% rate on the amount above the nil rate band.
What is the taper relief percentage scale?
The reduction in the tax rate is 0% within 3 years, 20% between 3 and 4 years, 40% between 4 and 5 years, 60% between 5 and 6 years, and 80% between 6 and 7 years. After 7 full years, the gift becomes completely exempt and taper relief becomes irrelevant.
Who pays the Inheritance Tax after taper relief is applied?
The recipient of the gift is usually primarily liable for paying any Inheritance Tax due on a failed potentially exempt transfer, including after any taper relief reduction has been applied, though HMRC can pursue the estate if the recipient does not or cannot pay.
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Potentially Exempt Transfers: The 7-Year Rule Explained 2026/27
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