Taper relief for lifetime gifts

More on inheritance tax - mainly for advisers

Taper relief applies when the person who made a gift dies within seven years of making the gift. Taper relief reduces the amount of tax payable. Any tax due when the giver dies within 7 years is normally payable by the person who received the gift. It is possible to take out insurance to cover this risk of an unexpected tax bill.

It is rather unlikely that there will be any tax due on a lifetime gift, even if the giver dies within seven years. This is because, for tax to be due, the value of gift and other gifts made by the giver in the seven year before the date of the lifetime gift would need to exceed the Inheritance tax threshold (of £325,000). In addition, there could be an annual exemption to deduct for the year of gift (plus any unused annual exemption from the previous year).

The most likely impact of death within seven years of a lifetime gift is to increase the tax payable on the estate at death. This is because gifts within seven years of death use up part of the inheritance tax threshold (£325,000). The recipient of a lifetime gift, could, exceptionally, be liable to tax, but only if the gift (and gifts in the previous 7 years) exceeded the inheritance tax threshold.

The taper rates are given in the table below:

Inheritance tax taper relief

(Gifts within seven years of death)

Number of years between gift and death

Percentage reduction in tax charge from full death rates

More than

Not more than

0

3

0

3

4

20

4

5

40

5

6

60

6

7

80

7

100

Taper Rate Example:

John gives £200,000 to his niece in March 2008. He then makes a further gift of £150,000 to his nephew in March 2009. John dies in 2012, three and a half years after making the gift to the nephew. The gifts in 2008 and 2009 were potentially exempt gifts. Following John’s death, the gift – being within 7 years of death – becomes chargeable to inheritance tax. (‘Chargeable’ means that the gifts have to be taken into account for inheritance tax purposes. There may still be further reliefs available to reduce the amount of tax due).

Assuming that John made no gifts in the 7 years before March 2008, there is no tax due on the gift to the niece as it is below the £325,000 limit. But the gift to the niece uses up part of the £325,000 limit. The amount used up is less that the full £200,000 of the gift, as annual exemptions for the current and previous tax years are unused can be deducted. So the inheritance tax threshold available is reduced by £194,000 (£200,000 less £6,000 (two x £3000 annual exemption)). This means that only £131,000 (the full £325,000 less £194,000) is available against the gift to the nephew in 2009.

The gift to the nephew can be reduced by the annual exemption for 2008/09 of £3,000, but not by the exemption for the previous year as this has been used against the gift to the niece. The chargeable gift to the nephew becomes £147,000. The inheritance tax threshold remaining is only £131,000. This means that £16,000 of the gift to the nephew is now taxable.

The rate of tax at death is 40%. But taper relief reduces this because John lived for between 3 and 4 years after the gift. The taper rate is 20%. So the tax rate which applies to the gift is reduced by 20% of the normal death rate. This means that the tax rate will be only 80% of the normal 40% rate which applies at death – that is 32%.

The tax due is therefore £16,000 x 32% = £5,120. This is payable by the nephew.

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