Thinking about what will happen to your wealth after you pass away can feel daunting. However, taking the time to plan ahead can help provide greater certainty for you and your loved ones.
Understanding key concepts such as how taper relief on Inheritance Tax works and how it fits into your estate planning, can play a significant role in passing on wealth efficiently and ensuring more of your estate reaches your loved ones. While taper relief is often misunderstood, in the right circumstances it may help reduce the amount of Inheritance Tax payable on certain gifts made during your lifetime.
In this article, we explain what Inheritance Tax taper relief is, when it may apply, how it works and important tax and record-keeping considerations to keep in mind when gifting.
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax that may apply to your estate (e.g. property, savings, and investments) when you pass away. IHT is generally charged at 40% on the value of an estate above the available tax-free thresholds and the tax is typically paid from the estate itself before assets are distributed to your nominated beneficiaries.
Each individuals has a nil-rate band (NRB) of up to £325,000. Any estate value below this amount can usually be passed on free from IHT. Where the value of an estate exceeds available nil-rate bands, IHT may apply to the portion above.
In addition to the NRB, a residence nil-rate band (RNRB) of up to £175,000 per person may be available when passing a qualifying primary residence to direct descendants, such as children or grandchildren. Where available, this may increase the amount that may be passed on free from IHT up to £500,000 for individuals.
For married couples and civil partners, these allowances can often be transferred on death to the surviving spouse with no IHT liability. This means a couple may be able to pass on up to £1 million free from IHT where both allowances are fully available. Additionally, assets transferred between spouses or civil partners are generally exempt from IHT, provided you are a permanent UK resident and legally married or civil partnered with that person.
What is Taper Relief?
One tool commonly used to mitigate a person’s Inheritance Tax (IHT) liability is lifetime gifting. Many people choose to pass on assets before they pass away as part of their estate planning to help reduce the amount of IHT their estate may be liable for. These gifts are known as Potentially Exempt Transfers (PETs).
In essence, if the person making the gift survives for seven years from the date it was given, the gift will generally fall outside of their estate for IHT purposes.
However, if the person making the gift passes away within those seven years, IHT may be due on the gift. This is potentially at the full rate of 40% but may taper down depending on how much time has passed since the gift was made. This is known as the 7-Year Rule.
For example:
- If death occurs within three years of making the gift, IHT may be payable at the full rate (40%).
- If death occurs between three to seven years, the IHT payable may reduce on a sliding scale through taper relief, with the IHT rate reducing in accordance with how long the person survived for since the gift was made.
How does Taper Relief work?
The amount of IHT that may be payable on a gift will depend on how long the person making the gift survives after it is made. Where tax is due, taper relief may reduce the rate of tax applied to qualifying gifts made between three and seven years before death.
From the third year onwards, the rate of tax reduces on a tapering scale by 8% per year, until no further tax is due (once seven years have passed).
It is important to note that taper relief applies to Potentially Exempt Transfers (PETs) and not the estate as a whole. It works by reducing the tax payable on qualifying gifts over the seven-year period and not the value of the gift itself.
Taper relief rates for the 2026/27 tax year:
| Years between gift and death | Rate of tax on the gift |
| 0 to 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 years or more | 0% |
If you are unsure whether taper relief may apply to gifts you have given to your loved ones, contact us today to speak with one of our expert financial advisers. We can help determine your potential liability and discuss your wider estate planning strategy to help ensure your wealth is passed on as tax-efficiently as possible.
An example of taper relief:
An individual gifts their child £500,000 in April 2021 and passes away in January 2026.
As the gift was made within seven years of the individual’s death, this means the gift may be subject to IHT.
The nil-rate band (NRB) at the time of the individual’s death is £325,000 which is deducted from the total value of the gift before IHT is calculated:
- £500,000 (gift) – £325,000 (NRB) = £175,000 (amount subject to IHT).
Without taper relief, this gift would be taxed at the standard rate of 40%, resulting in a liability of £70,000.
However, because the individual passed away four years and nine months after making the gift, taper relief applies. This means the rate of IHT on the £175,000 is reduced to 24% from 40%, resulting in:
- The original £70,000 IHT liability being reduced to £42,000 (24% x £175,000).
- Leading to a £28,000 IHT saving.
Important Tax and record-keeping considerations for taper relief
- Understanding the Nil-Rate Band.
Taper relief is only required when the total value of accumulated gifts exceed the available nil-rate band threshold of £325,000 (or potentially more where transferable allowances apply).
- Be aware of Capital Gains Tax (CGT).
While some gifts may fall outside of IHT planning concerns, they may instead create CGT concerns.
This can be relevant where chargeable assets, such as investments or property that is not your primary residence, are gifted or later sold by the recipient. For example, if a beneficiary inherits or receives an asset and later disposes of it at a gain (profit), CGT may apply.
This showcases how gifting may have wider tax implications beyond IHT alone, making holistic estate and tax planning essential to ensure your wealth is passed on as tax-efficiently as possible.
- The importance of accurate record keeping.
Keeping accurate records of gifts made during your lifetime is an often overlooked but important part of estate planning. It is recommended to keep a note of the following:
- What the gift was.
- Who it was gifted to.
- When it was gifted.
- The value of the gift at the time it was given.
Keeping accurate and up-to-date record keeping can help:
- Support the administration in your estate.
- Make it easier for executors (nominated individual(s) handling your estate after you pass away) to assess potential tax liabilities.
- Provide evidence should HMRC request clarification.
- Ensure any available exemptions or reliefs are not overlooked.
In practice, clear records can help reduce uncertainty for you and your family and make managing your estate considerably more straight forward.
How can Cooper Associates Wealth Management help?
By gifting to your loved ones during your lifetime, they may be able to utilise taper relief which can potentially lead to significant savings on IHT. However, professional guidance is essential to ensure you are making the most sensible decision when it comes to your current financial situation and wider estate planning strategy.
Our team of expert financial advisers can advise you on how to incorporate tax relief into your estate planning, helping you calculate potential tax savings and optimise gifting strategies by providing holistic advice tailored to your personal circumstances. Our aim is to help ensure your wealth is passed on as tax-efficiently as possible to those you love.
Whether you are at the beginning of your estate planning journey or would like guidance on the future direction of your wealth, get in touch today to book a fee-free, no-obligation consultation.
*The value of an investment with St. James’s Place may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
