IHT Taper Relief

30 November 2018

We have seen, from the number of queries that we get, that in general people do not really understand Taper Relief, PET’s (Potentially Exempt Transfers), CLT’s (Chargeable Lifetime Transfers to Discretionary Trusts) and the order in which gifts are assessed for IHT.  So it may be an idea to look at Taper Relief, as a starting point, once again. 

If there is Inheritance Tax to pay, it is charged at 40% on gifts given in the 3 years before you die.

The 7 year Rule

If there is Inheritance Tax to pay, it is charged at 40% on gifts given in the 3 years before you die.

Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

 

Years between gift and death               Tax paid

Less than 3                                              40%

3 to 4                                                      32%

4 to 5                                                      24%

5 to 6                                                      16%

6 to 7                                                      8%

7 or more                                                 0%

 

For Example: Sally died on 1 July 2018. She was not married or in a civil partnership when she died.

Sally left 3 gifts in the 7 years before her death:

  1. £300,000 to her brother 6.5 years before her death
  2. £50,000 to her sister 4.5 years before her death
  3. £150,000 to her friend 3.5 years before her death

There is a £325,000 inheritance tax threshold. Anything below this amount is tax free.

£300,000 is used up by the gift Sally gave her brother. There is no tax to pay on his gift.

The remaining £25,000 is used up by her £50,000 gift to her sister. There is tax to pay on the amount not covered by the threshold. That means there is tax to pay on £25,000 of the gift to Sally’s sister at a rate of 24%.

The £150,000 gift given to her friend is taxed at a rate of 32%.

Sally’s remaining estate was valued at £500,000 and charged at the usual 40% inheritance tax rate. Sally used up the tax-free threshold on gifts given before her death.

Gifts are not counted towards the value of your estate after 7 years.