View more on these topics

Getting to grips with taper relief

How gifting makes sense of this confusing area of tax

Gifts that are worth more than the
£3,000 annual exemption are potentially subject to inheritance
tax. But the amount of tax to pay on these gifts depends on how long the donor survives following each respective gift. If someone dies within seven years of making a gift it may be liable to IHT, but could benefit from taper relief.

One of the most confusing aspects of taper relief is that it does not reduce the capital value of a transfer but, rather, it decreases the tax payable. Therefore, if there is no tax payable on the gift, the relief will not be applied. In turn, this means any gift that sits inside the nil-rate band – currently £325,000 – cannot benefit from taper relief, making it very useful for high net-worth individuals.

Mark Devlin: When IHT exemptions are not exempt

When and how does taper relief work?

Most lifetime gifts are potentially exempt transfers which, as long as the donor lives for more than seven years from the date of the gift, become fully exempt after this time. However, if they don’t live for the full seven years, taper relief will be applied on a sliding scale which decreases the tax payable as long as there is more than three years between the date of the gift and the date of death.


Case studies

For the purpose of these case studies, assume that all lifetime exemptions have already been used and no other gifts have been made.

This following case illustrates when taper relief would not be applied: Frank makes a gift of £350,000 to his only son in January 2010. He subsequently dies in February 2012, just over two years later. The amount is above the nil-rate band, which means there is IHT to pay, but because Frank died within three years of making the gift there is no taper relief available.

The IHT calculation is: £350,000 (value of gifts) – £325,000 (NRB) = £25,000 x 40% (rate of IHT on death) = £10,000 tax payable.

This following case illustrates when taper relief would be applied: Francesca has an estate of £1m and makes a gift of £500,000 to her daughter on 2 October, 2010. She dies five years later on 13 October, 2015. The gift was made more than five years before death, but the amount is above the IHT nil-rate band at date of death, which means IHT will need to be paid.

The IHT calculation is: £500,000 (value of gift) – £325,000 (NRB) = £175,000 x 40% = £70,000.

As the gift was made between five and six years before the date of death, taper relief applies to the tax payable. £70,000 x 60% taper relief = £42,000. This means that tax payable is £28,000 (£70,000 – £42,000).

However, there will also be IHT due on Francesca’s remaining assets held within her estate (£500,000). As the nil-rate band has already been used by the failed gift, IHT will be charged at the full amount: £500,000 x 40% =£200,000.

Phil Wickenden: Why IHT protection should not be overlooked

Additional key points about taper relief 

Something to bear in mind is that the nil-rate band is applied in chronological order.

This means any gifts within a seven-year period prior to death will also claim the nil-rate band before any other assets or property within the deceased’s estate.

For example, if someone with an estate of £500,000 gifted £162,500 in 2016, another £162,500 in 2017 and then died in 2018, then not only would taper relief not apply but they would also have to pay full IHT on the remaining £175,000 in the deceased’s estate.

Taper relief can help make the transfer of someone’s estate very tax efficient if the person lives long enough to take advantage of the relief available. However, there are some negatives to lifetime gifting, such as the fact you lose control of the asset and may reduce your financial independence if you live for longer than expected and no longer have access to the money.

Rachael Griffin is tax and financial planning expert at Old Mutual Wealth


FCA working group recommends five voluntary cost disclosure templates

The group tasked with increasing investment cost transparency has released its recommendations, including suggesting five fee disclosure templates. The institutional disclosure working group, led by transparency champion Chris Sier, was created by the FCA last September following the package of remedies outlined in the FCA’s  final report into the asset management industry. The group published a […]


OMGI reveals new name

Old Mutual Global Investors will be renamed Merian Global Investors from the autumn. The name change follows the completion of the sale of the single-strategy business to TA Associates last week. The exact date of the renaming is yet to be confirmed with OMGI going by its current name until then. OMGI chief executive Richard […]

Equity release a growing market for solicitors – Pru

Research from Prudential conducted among UK private client solicitors shows a growing need for advisory work in equity release. Twenty nine per cent of solicitors believe demand for legal guidance in the area of equity release will increase in the next five years and over the last two years, one in four (26 per cent) […]

Jonathan Platt

Bonds face up to stormy conditions

As bonds face up to stormy conditions, Jonathan Platt, Head of Fixed Income at Royal London Asset Management shares three key trends our Fixed Income Team have seen shaping bond markets recently. Read the article here. Past performance is not a guide to future performance. The value of investments and the income from them is […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm