This is a popular question and often causes confusion. So I thought I'd lay out a brief explanation of how inheritance tax (IHT) taper relief works.
But first I suggest that you download this excellent free guide to Inheritance tax including tips on how to cut your IHT bill. This is byfar the best guide I've seen on the subject as it's been written byaward-winning, independent, chartered financial planners. it will guide you through everythingyou should be doing now to eliminate inheritance tax.
Once you've downloaded it turn to page 10 to see a full list of the exemptions you can possibly claim to reduce your IHT bill. Pages 4 and 5 has an excellent explanation ofhow it is now possible to pass on your home without paying inheritance tax. Finally, page 12 onwards explainotherways to cut your inheritance tax bill, including how trusts can be used. Best of all, the guide is FREE and could save you thousands of pounds in tax.
The inheritance tax threshold
First of all the current personal IHT free allowance is £325,000, which is the amount up to which an estate will not have to pay IHT.
If your estate when you die is – including any assets held in trust and gifts made within seven years of death – more than £325,000, IHT will be due at 40 per cent on the amount over the £325,000. You can use this inheritance tax calculator to work out your potential IHT bill (worst case scenario) in seconds.
Taper relief
Taper relief is a tax relief that is applicable when inheritance tax is due on a gift that is made within 7 years prior to the donor's death. More precisely, if the donor dies between three and seven years after making a gift, and the total value of gifts that they made is over the threshold, any Inheritance Tax due on the gifts is reduced on a sliding scale. This is what is known as Taper Relief.
The rate at which taper relief is applied is determined by the timing of the gift as shown in the table below:
| Time between the date the gift was made and the date of death | tax due |
|---|
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
The key points to remember are:
- that taper relief applies only on gifts
- Taper relief only comes into play when the cumulative value of any gifts within the 7 years prior to death exceeds the personal IHT allowance (£325,000 for 2023/24 tax year)
- Taper relief reduces the tax payable on the portion of the gifts over the IHT allowance
- Gifts always use up the Inheritance Tax threshold first before the value of any other assets or property that you leave behind.That means that until 7 years have passed IHT would be payable on part of your estate if the value of your estate and gifts exceed the IHT allowance.
- Gifts are removed from the IHT calculation after 7 years from the date they were made
It is perhaps the fourth point which actually catches people out and can lead to the donor believing that the potential IHT liability on their estate is lower than it could be if they were to die shortly after making gifts.
Perhaps all of this can be illustrated by way of a couple of examples:
Example 1
- Let's assume Mr X gifts £100,000 to his daughter in Jan 2008
- He gifts a further £100,000 to his daughter in Jan 2011
- He dies in July 2014 with an estate worth £100,000
IHT bill – there would be no IHT payable as the value of the gifts plus the estate at death was less than the IHT threshold of £325,000.
Example 2
- Let's assume Mr X gifts £100,000 to his daughter in Jan 2008
- He gifts a further £100,000 to his daughter in Jan 2011
- He dies in July 2014 with an estate worth £200,000
IHT bill – the cumulative total of gifts within 7 years of Mr X's death was under the IHT threshold leaving only £125,00 of the allowance left to be applied against Mr X's estate of £200,000. That means that the estate has a IHT liability of 40% on £75,000 = £30,000
Example 3
- Let's assume Mr X gifts £200,000 to his daughter in Jan 2008
- He gifts a further £200,000 to his daughter in Jan 2011
- He dies in July 2014 with an estate worth £200,000
IHT bill – the cumulative total of gifts within 7 years of Mr X's death was £400,000 i.e. over the Inheritance Tax threshold. That means that the entire IHT threshold has been used by the gifts meaning that £75,000 of the gift made in Jan 2010 and the entire value of the estate are liable to IHT.
But as the gift that tipped over the IHT threshold was made between 3-4 years before Mr X died there is a 20% reduction on the IHT liability relating to the gift, which in the case of a gift would be payable by the donee (which is thedaughter). That means the IHT that would be charged at the IHT rate of 40% is reduced by 20%. Or in other words the potential £30,000 bill is reduced by 20% to £24,000.
Meanwhile, Mr X's estate is totally chargeable to IHT at 40% which equates to a bill of £80,000 usually taken from the value of the estate.
The importance of planning
Giving away money or assets is the simplest way to avoid paying inheritance tax and passing more money on to your family. However, as you can see from above, a lot depends on the timing and size of the gifts as well as the size of your estate. Yet it is possible to put in place other simple measures that will reduce your IHT bill without having to give your money away. Have a look at pages 12 to 16 of the aforementioned FREE guide to reducing your IHT bill which explains how pensions and trusts can be used topass on more of your wealth.
FAQs
More precisely, if the donor dies between three and seven years after making a gift, and the total value of gifts that they made is over the threshold, any Inheritance Tax due on the gifts is reduced on a sliding scale. This is what is known as Taper Relief.
How to calculate tapering relief? ›
Full rate of tax on the gift: 40%x £50,000 = £20,000. The gift is within three to four years of the death, so taper relief restricts the tax charge to 80% of the full rate. Revised tax charge: £20,000 x 80% = £16,000. (The relief is £4,000).
Does taper relief apply to all gifts? ›
So, if you make gifts totalling less than the Nil Rate Band in the seven years before you died then there will be no IHT to pay on the gifts. In effect, Taper Relief only applies to the part of the gift you have made which is in excess of the Nil Rate Band.
How to calculate IHT on gifts? ›
Gifts given in the 3 years before your death are taxed at 40%. Gifts given 3 to 7 years before your death are taxed on a sliding scale known as 'taper relief'.
How much money can you gift to a family member tax-free in the UK? ›
How much money can you gift tax-free in the UK? In the UK, you can give away up to £3,000 per year as gifts without having to pay any tax. This is known as the annual exemption. It means that you can give away up to £3,000 per year to anyone you like, without having to pay any tax on it.
What is the tapered formula? ›
To find taper per inch: Find the difference between major and minor diameters. Divide the difference with the length of the taper region.
How do you calculate tapering? ›
To calculate the taper length, subtract the smaller diameter from the larger diameter, then divide by the overall length.
How does gift relief work? ›
The effect is that you, as the donor (person making the gift), do not pay any tax on disposing of the asset, but instead you pass on the gain to the donee (person receiving the gift) and this is deducted from their base cost.
What replaced taper relief? ›
The new flat rate system will replace the taper relief regime introduced by Gordon Brown in 1998. From next April, we will no longer be concerned with how long an asset has been held or whether it qualifies under the rather tortuous 'business asset' rules – the flat rate of 18% will apply to everything.
How does HMRC find out about gifts? ›
Once probate has been granted, the executor can start distributing your estate. However, in order to get probate, your executor will need to complete a form with a declaration of any gifts that have been given, so that HMRC can correctly calculate any inheritance tax liability on your estate.
Inheritance tax is payable by the beneficiaries of your will. These are the people who inherit your estate, often your children or grandchildren.
What is the IRS answer on gifts and inheritance? ›
Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).
What is the formula for gift tax? ›
The amount of the gift tax payable in the current year is determined by computing the tentative tax on all taxable gifts for the current calendar year and each preceding period, less the tentative tax on all taxable gifts for each of the preceding periods. The maximum gift tax rate is 40%.
How to calculate taper relief? ›
£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%.
Do I have to pay tax on money gifted from overseas to the UK? ›
Tax implications of transferring money to the UK. UK residence and tax: Your residence status in the UK is the deciding factor in whether your foreign income is taxable or not. Non-residents' overseas income is not taxable; they only pay tax on their income in the UK.
How much can you inherit from your parents without paying taxes in the UK? ›
There's normally no Inheritance Tax to pay if either: the value of your estate is below the £325,000 threshold. you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.
Does taper relief still exist? ›
Save Tax with Capital Gains Tax Taper Relief
Capital Gains Tax Taper Relief was able to save you many thousands of pounds in tax. Unfortunately this relief no longer exists but there are lots of other strategies you can use to reduce your CGT when you sell property, a business, shares or other assets.
How do you calculate taper turning ratio? ›
The CNC Taper Turning Formula
When dealing with Taper Per Foot (TPF), you must use the formula: Alpha = arctan(TPF/12). The subsequent step delves into calculating the radius (r) at each point along the taper's length.
What is the taper relief for business assets? ›
Taper relief reduces the gain chargeable to capital gains tax on a sliding scale depending on: ❖ the number of years the asset has been owned. ❖ whether or not the asset qualifies as a business asset. ❖ The maximum period of ownership is ten years to the time of disposal.
Do you get taper relief on CLT? ›
Death tax on CLTs
However, as with PETs, if there are more than three years between the date of CLT and the date of death, taper relief is available to reduce the tax. The trustees receive credit for any lifetime tax paid on the CLT.
This is a popular question and often causes confusion. So I thought I'd lay out a brief explanation of how inheritance tax (IHT) taper relief works.