Briefing Notes Fund Adviser Fees 680 392

Inheritance tax taper relief

When taper relief applies and how it can reduce the tax that needs to be paid on lifetime gifts.

Taper relief causes a lot of confusion over when it applies and how it works.

To start with, although it is called taper ‘relief’, it is not strictly a relief as defined elsewhere in the Inheritance Tax Act 1984 (IHTA). It is actually a percentage reduction in the tax payable. It does not reduce the capital value of the gift – it only reduces the actual tax payable. Therefore, if there is no tax payable on death on a specific gift, you cannot claim taper relief to reduce the value of that gift.

Consequently, any gift which sits inside the available nil rate band (NRB) – currently up to £325,000 or up to £650,000 if a transferable nil rate band is available – cannot benefit from taper relief. Taper relief (under IHTA/S7(4)) applies where:

  1. the gift was made more than three years but less than seven years before the transferor’s death, and
  2. tax is due on the gift in its own right.

 

Time between date of gift and
date of donor’s death
Percentage taper relief
applied to tax due
Effective rate of
tax on gift
0 to 3 years 0% 40%
3 to 4 years 20% 32%
4 to 5 years 40% 24%
5 to 6 years 60% 16%
6 to 7 years 80% 8%

Examples

Here are some examples, all of which assume that lifetime exemptions have already been used elsewhere and no other gifts have been made:

Example 1:

  • Jack made a gift of £360,000 in total to his four sons in December 2018.
  • He died in May 2020.

The gift was made within 2 years of Jack’s death and it is above the available NRB at the date of death. Therefore, there is IHT to pay by the recipients of the gift .

IHT: The IHT calculation is: £360,000 (value of gift ) – £325,000 (NRB) = £35,000 x 40% (rate of IHT on death) = £14,000 tax payable.

Taper relief: Unfortunately, as Jack died within three years of making the gifts there is no taper relief available.

 

Date of gift Type Available NRB Value of gift Complete years since gift Tax due Taper relief Ta\\x after taper relief
01/12/2018 PET £325,000 £360,000 1 £360,000-
£325,000 =
£35,000 @
40% = £14,000
n/a £14,000

 

Example 2: 

  • Jon made a gift of £300,000 to his son on 1 March 2015. 
  • He died on 20 October 2018.

The gift was made over three years before death, but its value is below the available NRB at the date of
death.

IHT: Remember that gift s made in the seven years prior to death are off set against the NRB in chronological order and, once the NRB has been fully used up, any excess gift(s) will potentially be subject to IHT.

Taper relief: As there is no tax directly attributable to the gift there is no taper relief available.

Date of gift Type Available NRB Value of gift Complete years since gift Tax due Taper Relief Tax after taper relief
01/03/2015 PET £325,000 £300,000 3 n/a n/a n/a

 

Example 3:

  • Peter made a gift of £350,000 to his son on 1 July 2015.
  • He died on 5 November 2018

The gift was made over three years before death and the value is above the available NRB at date of death. Therefore, IHT is due.

IHT: The calculation is: £350,000 (value of gift ) - £325,000 (NRB) = £25,000 x 40% = £10,000.

Taper relief: As the gift was made between 3 and 4 years before the date of death, taper relief applies to the tax payable.

Date of gift Type Available NRB Value of gift Complete years since gift Tax due Taper relief Tax after taper relief
01/07/2015 PET £325,000 £350,000 3 £350,000
- £325,000
= £25,000
@ 40% =
£10,000
£10,000
@20% =
£2,000
£10,000 -
£2,000 =
£8,000
payable by
Peter’s son

 

Example 4: 

  • Emily made a gift of £200,000 into a discretionary trust on 10 June 2014.
  • She had also given her daughter £200,000 in November 2012.
  • Emily died on 24 February 2019.

The gift into the trust was made over four years before death and its value, when added to the failed gift made in November 2012 of £200,000, is over the available NRB at the date of death (£325,000). Therefore, IHT is due.

IHT: The calculation is: £325,000 (NRB) - £200,000 (failed PET) = £125,000 (available NRB). £200,000 (gift to trust) - £125,000 (available NRB) = £75,000. IHT @ 40% x £75,000 = £30,000 tax.

Taper Relief: Taper relief applies against the £30,000 tax payable and, as the gift was made between 4 and 5 years before the date of death, the percentage relief is 40%.

Taper relief and relevant property trusts. If you are recalculating the tax due on discretionary trusts on death, where there was a lifetime tax charge at inception, you do get credit for the lifetime tax paid. This may mean that no further tax is payable – but no refund of tax paid at inception is available if the tax due on death is a lower amount.

Date of gift Type Available NRB Value of gift Complete years
since gift
Tax due Taper relief Tax after taper relief
01/11/2012 PET £325,000 £200,000 6 n/a n/a  n/a
10/06/2014 CLT £125,000 £200,000 4 £200,000 -
£125,000 =
£75,000@
40% =
£30,000
£30,000
@ 40% =
£12,000
£30,000 -
£12,000 =
£18,000
payable by
the trustees
of the
discretionary
trust

 

Example 5: 

  • Michael created a discretionary trust in March 2009 for £312,000.
  • He then created a further discretionary trust in September 2013 for £325,000. At this point, the trustees paid a lifetime tax charge (20%) on the excess over the cumulative seven year total.
  • Michael died on 13 December 2016.

The first discretionary trust (£312,000) had run more than seven years and is therefore not included in Michael’s death calculation for IHT payable on his estate. However, when we look at the calculation for the second discretionary trust (£325,000), we have to look back seven years from inception of this trust and the first discretionary trust has to be included as it was created in the seven years prior to this one.

IHT: Therefore the calculation on death is:

£637,000 (total of all CLTs within seven years of inception of second trust) minus £325,000 (NRB) = £312,000 x 40% (IHT rate on death) = £124,800.

Taper Relief: Michael died between 3 and 4 years from inception, therefore taper relief applies at 20%.

Date of gift Type Available NRB Value of gift Complete years since gift Tax due Taper Relief Tax after taper relief
01/03/2009 CLT £325,000 £312,000 7+ n/a n/a  
01/09/2013 CLT £13,000 £325,000
IHT on gift :
£325,000 -
£13,000 =
£312,000 @
20% = £62,400
3 £312,000 +
£325,000 =
£637,000-
£325,000
= £312,000
@ 40% =
£124,800
£124,800
- £24,960
-£62,400 =
£37,440
payable by
the trustees
of the
discretionary
trust
 

 

Example 6:

If we take the above example but change Michael’s date of death to 13 December 2019, the calculation on death would be:

IHT: £637,000 (total of all CLTs minus £325,000 (NRB) = £312,000 x 40% (IHT rate on death) = £124,800.

Taper Relief: Michael now died between 6 and 7 years from inception, therefore taper relief applies at 80%. The taper relief has reduced the tax payable to less than
the tax that was paid at inception (£62,400), so no tax is payable on death - but no refund of the tax paid at inception is available.

Date of gift Type Available NRB Value of gift Complete years since gift Tax due Taper Relief Tax aft er
taper relief
01/03/2009 CLT £325,000 £312,000 7+ n/a n/a n/a
01/09/2013 CLT £13,000 £325,000
IHT on gift :
£325,000 -
£13,000 =
£312,000 @
20% = £62,400
6 £312,000 +
£325,000 =
£637,000-
£325,000
= £312,000
@ 40% =
£124,800
£124,800
@ 80% =
£99,840
£124,800
- £99,840
-£62,400
= £0

 

Planning points

  1.  Where multiple lifetime gifts have been made, you must work out the amount of NRB available to each gift separately and then apply taper relief to each gift separately where applicable.
  2. The application of taper relief to the tax payable on individual gift s does not reduce the value of those gifts when looking at subsequent gift s or the estate
    on death.
  3. Taper relief only applies to gift s made more than three years but less than seven years before death.
  4. It is the value of the gift at the date the gift was made that is used in the calculation – not the value of the gifted property at the date of death.
  5. Every individual has an NRB (currently £325,000) on which IHT is payable at 0%. This NRB can be increased by any transferable NRB available from a deceased spouse or civil partner and so could add up to £650,000. Therefore, IHT only applies to gift s when the cumulative value of chargable gift s made within the seven years prior to death exceeds the available NRB.
  6. Gifts made within the seven years prior to death will use the available NRB in chronological order before it can apply to any other assets or property that the deceased leaves on death.
  7. Certain chargeable transfers made up to 14 years before death could be included when calculating tax due on gifts within seven years of death (but not the tax due on the death estate), as any chargeable transfers made in the seven-year period prior to a PET, made within seven years of death, will be included.
  8. For CLTs, the IHT liability on death is first calculated at the full death rate (40%) then any applicable taper relief is deducted and finally any lifetime IHT (20%) paid at inception is deducted. If this produces a negative amount, no refund is due.
  9. If the settlor paid the lifetime tax on a gift then you must include the tax paid when calculating the value of the gift at inception. For example: settlor gifts £350,000 to a discretionary trust (assume all exemptions have been used) and the settlor then pays the £6,250 lifetime tax charge. (£350,000 - £325,000 = £25,000 x 20% = £5,000; plus grossed-up £6,250 x 20% = £1,250; £5,000 + £1,250 = £6,250). Value of gift for IHT purposes is grossed up to £356,250. (Lifetime tax = £356,250 - £325,000 x 20% = £6,250).
  10. Individual gift s are removed from the IHT death calculation on the estate seven years from the date they were made.

This document is based on Canada Life’s understanding of applicable UK tax legislation and current HM Revenue & Custom’s practice, as at May 2019 and could be subject to change in the future. It is provided for professional advisers only. Any recommendations are the adviser’s sole responsibility.