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Lifetime gifting is key in estate planning and can significantly reduce the inheritance tax (IHT) due on death. However, misunderstandings around lifetime gifting, the seven-year rule and taper relief can lead to unexpected tax bills, particularly when large gifts have been made within seven years of death.
One misconception that comes up time and time again is that many people believe that taper relief reduces the value of a gift for IHT purposes, rather than the rate of tax payable on the gift.
This article explores how taper relief operates in practice, why it is often less helpful than expected and when it genuinely makes a difference.
How taper relief works
The seven-year rule:
Some lifetime gifts are automatically exempt from IHT, such as the first £3,000 gifted in a tax year, small gifts of up to £250 per recipient or gifts between spouses. Most other outright gifts are treated as Potentially Exempt Transfers (PETs). This means that the gift will be exempt from IHT, provided the donor survives seven years after making the gift. If the donor dies within seven years of making the gift, the gift becomes what’s known as a “failed PET” and is chargeable to IHT, subject to the availability of the donor’s nil rate band (the IHT threshold below which no tax is payable, currently frozen at £325,000).
Taper relief:
When a lifetime gift becomes chargeable to IHT, taper relief can help to reduce the tax burden where the donor dies more than three years after making the gift. Taper relief reduces the rate of tax from the usual 40% on a sliding scale depending on the length of time between the gift and death.
| Years between gift and death | Percentage of full tax rate | Effective tax rate |
| 0-3 years | 100% | 40% |
| 3-4 years | 80% | 32% |
| 4-5 years | 60% | 24% |
| 5-6 years | 40% | 16% |
| 6-7 years | 20% | 8% |
| 7+ years | No tax | No tax |
So far, so familiar. But this is where taper relief is often misunderstood.
The key misconception
It is key to understand that taper relief does NOT reduce the value of the gift. Instead, it reduces the amount of IHT payable on the gift and only if tax is actually due in the first place.
This distinction is crucial because for many estates, no tax is payable on lifetime gifts anyway due to the availability of the nil rate band.
Taper relief only becomes relevant if:
- The donor dies within three and seven years from having made a gift, AND
- The total value of the gift exceeds the available nil rate band.
This means that if the total value of gifts and other chargeable transfers made within the 7 years before death is below £325,000, taper relief is irrelevant. This is why advisers often say taper relief is far less generous than people assume.
Where the value of a gift is over £325,000, or over the value of the donor’s remaining nil rate band, IHT is due on the surplus. In this scenario, taper relief reduces the rate of IHT due on the surplus value of the gift. The relief does not reduce the value of the gift itself. Crucially, this means that the gift can still exhaust the nil rate band.
The relief is best illustrated by way of an example:
Margaret makes a gift of £500,000 to her son.
She has not used any of her nil rate band previously.
She dies five years and six months later.
Step 1: apply the nil rate band
Gift: £500,000
Less nil rate band: £325,000
Chargeable amount: £175,000
Step 2: calculate the tax before taper relief
IHT at death rate (40%): £175,000 × 40% = £70,000
Step 3: apply taper relief
Death occurs between five and six years after the gift, so only 40% of the full tax rate applies (i.e. an effective rate of 16%).
£70,000 × 40% = £28,000 IHT payable
The core message
Taper relief is often spoken about as though it reduces the value of lifetime gifts. In fact, it only reduces the rate of IHT payable on the portion of the gift exceeding the nil rate band. Where the nil rate band fully covers the gift, taper relief delivers no benefit at all.
The real message is simple: while taper relief can soften the tax blow where lifetime planning falls short, it is no substitute for early, well-structured estate planning.
If you would like assistance with lifetime gifting or estate planning, please contact a member of our Tax, Trusts & Succession team.