8 min Read
09 May 2017

Inheritance tax (IHT) taper relief on gifts explained

iht taper relief explained
This is a popular question and often causes confusion. So I thought I'd lay out a brief explanation of how inheritance tax (IHT) taper relief works.

 

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But first I suggest that you download this excellent free guide to IHT including 8 steps to cut your IHT bill. This is by far the best guide I’ve seen on the subject as it’s been written by award-winning, independent, chartered financial planners. it will guide you through everything you should be doing now to eliminate inheritance tax.

Once you’ve downloaded it turn to page 10 to see a full list of the exemptions you can possibly claim to reduce your IHT bill. Pages 7 has an excellent explanation of how it is now possible to pass on your home without paying inheritance tax. Finally page 11 onwards explain other ways to cut your inheritance tax bill, including how trusts can be used. Best of all the guide is FREE and could save you thousands of pounds in tax. 

 

Paying less inheritance tax on gifts

The Savings Champion Inheritance Tax Guide is written by award-winning, independent, chartered financial planners. It will guide you through everything you should be doing now to eliminate inheritance tax.

Download the guide now

The inheritance tax threshold

First of all the current personal IHT free allowance is £325,000, which is the amount up to which an estate will not have to pay IHT.

If your estate when you die is – including any assets held in trust and gifts made within seven years of death – more than £325,000, IHT will be due at 40 per cent on the amount over the £325,000. You can use this inheritance tax calculator to work out your potential IHT bill (worst case scenario) in seconds.

Taper relief

Taper relief is a tax relief that is applicable when inheritance tax is due on a gift that is made within 7 years prior to the donor’s death. More precisely, if the donor dies between three and seven years after making a gift, and the total value of gifts that they made is over the threshold, any Inheritance Tax due on the gifts is reduced on a sliding scale. This is what is known as Taper Relief.

The rate at which taper relief is applied is determined by the timing of the a gift as show in the table below:

Time between the date the gift was made and the date of death  tax due
3 to 4 years 32%
4 to 5 years 24%
5 to 6 years 16%
6 to 7 years 8%

 

The key points to remember are:

  • that taper relief applies only on gifts
  • Taper relief only comes into play only when the cumulative value of any gifts within the 7 years prior to death exceeds the personal IHT allowance (£325,000 for 2015/16 tax year)
  • Taper relief reduces the tax payable on the portion of the gifts over the IHT allowance
  • Gifts always use up the Inheritance Tax threshold first before the value of any other assets or property that you leave behind. That means that until 7 years have passed IHT would be payable on part of your estate if the value of your estate and gifts exceed the IHT allowance.
  • Gifts are removed from the IHT calculation after 7 years from the date they were made

It is perhaps the fourth point which actually catches people out and can lead to the donor believing that the potential IHT liability on their estate is lower than it potentially could be if they were to die shortly after making gifts.

Perhaps all of this can be illustrated by way of a couple of examples:

Example 1

  • Let’s assume Mr X gifts £100,000 to his daughter in Jan 2005
  • He gifts a further £100,000 to his daughter in Jan 2008
  • He dies in July 2011 with an estate worth £100,000

IHT bill – there would be no IHT payable as the value of the gifts plus the estate at death was less than the IHT threshold of £325,000.

Example 2

  • Let’s assume Mr X gifts £100,000 to his daughter in Jan 2005
  • He gifts a further £100,000 to his daughter in Jan 2008
  • He dies in July 2011 with an estate worth £200,000

IHT bill – the cumulative total of gifts within 7 years of Mr X’s death was under the IHT threshold leaving only £125,00 of the allowance left to be applied against Mr X’s estate of £200,000. That means that the estate has a IHT liability of 40% on £75,000 = £30,000

Example 3

  • Let’s assume Mr X gifts £200,000 to his daughter in Jan 2005
  • He gifts a further £200,000 to his daughter in Jan 2008
  • He dies in July 2011 with an estate worth £200,000

IHT bill – the cumulative total of gifts within 7 years of Mr X’s death was £400,000 i.e. over the Inheritance Tax threshold. That means that the entire IHT threshold has been used by the gifts meaning that £75,000 of the gift made in Jan 2008 and the entire value of the estate are liable to IHT.

But as the gift that tipped over the IHT threshold was made between 3-4 years before Mr X died there is a 20% reduction on the IHT liability relating to the gift, which in the case of a gift would be payable by the donee (which is the daughter). That means the IHT that would be charged at the IHT rate of 40% is reduced by 20%. Or in other words the potential £30,000 bill is reduced by 20% to £24,000.

Meanwhile, Mr X’s estate is totally chargeable to IHT at 40% which equates to a bill of £80,000 usually taken from the value of the estate.

The importance of planning

Giving away money or assets is the simplest way to avoid paying inheritance tax and passing more money on to your family. However, as you can see from above a lot depends on the timing and size of the gifts as well as the size of your estate. Yet it is possible to put in place other simple measures that will reduce your IHT bill without having to give your money away. Have a look at page 18 of the aforementioned FREE guide to reducing your IHT bill which explains how pensions and life insurance can be used to pass on more of your wealth. 

 

Image: Jeroen van Oostrom / FreeDigitalPhotos.net

Article overview

Key points

  • If you want to pass on more of your wealth without paying unnecessary inheritance tax then planning is crucial
  • I suggest that you download this excellent free guide to IHT including 8 steps to cut your IHT bill. The guide has been written by award-winning, independent, chartered financial planners
  • If you do decide to gift assets then a tax relief, called taper relief, can be used to reduce any potential inheritance tax liability should the donor die within 7 years of the gift
  • Beyond 7 years there is not inheritance tax liability on the gift

Written by Damien

Damien is one of the most widely quoted money and investment experts in the national press and has made numerous radio & TV appearances. He created MoneytotheMasses.com while working in the City when he became disillusioned with the way the public were left to fend for themselves because they could not afford financial advice.

More about Damien

Comments

  1. Robert July 10, 2015 at 9:25 am

    Well done. the taper relief on lifetime gifts is often incorrectly described, even in guide books that should know better. It is the tax that is tapered not the gift and HMRC make you deduct the oldest gifts form the nil band first, so the taper is often applied to tax that is zero anyway and therefore has no effect.

  2. John Doherty June 16, 2015 at 7:02 am

    Damien, you say here that IHT can apply to ‘assets held in trust’ – I thought that the potential payout of life insurance policies, if written ‘in trust’, were no longer treated as part of your estate for IHT purposes? Or did this used to be the case and it now has changed?

    1. Damien Post authorJune 16, 2015 at 7:11 am

      Hi John,

      No IHT is not applicable on life policies written under an appropriate trust. I am referring here to gifts of cash or assets into a trust. You can find out more information if you follow this link

  3. Ron Patten August 14, 2012 at 6:27 pm

    Mr Fahy

    As an executor I am currently in the process of applying for grant of probate,through a solicitor. He has put me right by explaining that taper relief does NOT apply for gifts that do not exceed the nil rate band which, in this case is £650,000. You will know what I mean. This has got me thinking that in a similar (hypothetical)situation there could be a case where gifts totalling £600,000 were made between 6 & 7 years ago and there would be no taper relief. Quite amazing but true. Tell me I’m wrong. Might I suggest that your examples should now include situations where the carry-over of the nil rate band applies. Taper relief – forget it!!

    Yours, Ron Patten

    1. Damien Fahy August 15, 2012 at 12:08 am

      Hi Ron

      You are talking about a very specific instance, which is when someone inherits their spouse’s IHT nil rate band. You need to take each case on its own merit.

      But be careful, gifts made during the lifetimes are still important even when nil rate bands are inherited as this reader question highlights

      When I revisit this topic in the future I will try and include your suggested calculations.

      Thanks Damien