Inheritance tax taper relief

Taper Relief is an often misunderstood and misquoted inheritance tax relief. But it is a very useful and beneficial relief. People often think it applies to all lifetime gifts but this is not true.

When does Taper relief apply?

It only apples if the total of all the gifts made by the deceased exceeds the inheritance tax threshold at the date of death.  Although the inheritance tax threshold has remained unchanged for many years at £325,000 there are not many people who gift  in excess of this and so Taper Relief does not apply to many gifts.

The relief is available where there is inheritance tax to pay on any lifetime gifts over the value of the inheritance tax threshold and the gifts were made more than 3 and 7 or less years before death.

If the gifts were made in the first two years prior to death whatever their size no taper relief will apply.  If they were made more than 3 but 4 or less years before death the relief will be 20%, more than 4 but 5 or less 40%, more than 5 but 6 or less 60% and more than 6 but 7 or less 80%.  

The inheritance tax is payable by the person who received the gift rather than from the deceased’s estate.

The deceased may have made several gifts prior to death to different people and these can be accumulated to establish if taper relief applies.

Taper relief example

For example a gift of £80,000 made more than 6 but less than 7 years prior to death is below the inheritance tax threshold so no taper relief applies.  If a second gift to a different person of £140,000 was made more than 4 but less than 5 years prior to death the first gift is added making £220,000 but this is still below the tax threshold so again no taper relief applies but if a third gift to yet another person is made more than 3 but less than 4 years prior to death of £160,000 the first two gifts are added to it.  The total is £380,000.  As this is above the threshold of £325,000 there is inheritance tax to pay on the gift.

The tax is payable by the person who received the third gift and is not divided between all three people. As the gift is made more than 3 but less than 4 years before the date of death taper relief of 20% will apply.

If the threshold is increased by the transfer of the nil rate band from a spouse that predeceased then the gifts will need to exceed the combined threshold before taper relief can apply.  So in the above scenario of gifting if the threshold was increased by claiming the total unused nil rate band of a spouse so the threshold was £650,000 the combined total of the gifts is below this so no tax is attributed to the gifts and so no taper relief can apply.

How can Moore Barlow help

Taper relief is a complex relief especially when there have been multiple gifts so expert help is recommended to ensure the correct amount of tax is payable by the correct person. One of our Succession Planning specialists at Moore Barlow can assist.