Legal News | 1.07.19

Taper Relief on Gifts Made Less than Seven Years Before Death

A lot of people are familiar with the concept of the need to survive seven years from a gift of capital for the value of that gift to fall out of their estates for inheritance tax (IHT) purposes.(For more information, please click on this link to see our article published in December 2018).

There is a common misconception, however, that if you survive any gifts by between three and seven years the gift will be tapered resulting in a reduction in the IHT you pay on that gift…

This is not correct… the following is a run down of how taper relief works:

• On death, if you have failed to survive any lifetime gifts by seven years, and those gifts give rise to IHT it is the rate of IHT on the gifts which is tapered, not the size of the gifts
• the gifts must, therefore, have IHT payable on them at death because you have a) not survived them by seven years and b) because the total of those gifts has exceeded the nil rate band for IHT (currently £325,000) at the date of your death.
• The rate of IHT which becomes payable on death on those gifts is then tapered down from the third year you survive to the seventh year you survive when it is tapered to zero.

For example: 

Mr A makes a gift of £400,000 in May 2015 and died in April 2019. He made no other gifts in the seven years prior to his death.The calculation of IHT on his death in April 2019 on this gift would therefore be as follows:

• The nil rate band at Mr A’s death in April 2019 is £325,000
• The first £325,000 of his May 2015 gift is therefore free of IHT
• The remaining £75,000 would attract IHT
• If Mr A had died in 2017, less than three years from the gift, the IHT would have been 40% on £75,000, being £30,000 As Mr A has died between 3 and 4 years from the date of his gift the rate of IHT applied to the £75,000 can be tapered to 32%, giving rise to tax of £24,000
• If he had survived the gift by 4 to 5 years the IHT rate would have been tapered to 24%, 5 to 6 years would have been 16%, 6 to 7 years it would have been down to 8% and if he had survived the gift by seven years the value of the gift will have dropped out of his estate meaning he would regain his nil rate band.

So you can see that taper relief is only relevant for large lifetime gifts. For estate and tax planning purposes it would, therefore, be advisable to discuss any such gifting strategy with your solicitor to ensure the smooth administration of your estate in conjunction with your Will.

For more information about estate planning through lifetime gifting and through your Will, speak to your usual contact at Wansbroughs on 01380 733300 or contact us at wealth@wansbroughs.com.