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Inheritance Tax and Tapering

Taper relief can be a confusing concept, especially with regards to when it applies and how it works. This guide provides a breakdown of taper relief and how it can be used to mitigate your inheritance tax bill. If you have any queries regarding taper relief and how it may apply to your personal situation, one of our financial advisors will be able to talk you through this over a free Zoom consultation. Find our details at: https://inheritance-tax.co.uk/contact-us/

The Inheritance Tax Threshold

As a reminder, the standard inheritance tax threshold still stands at £325,000. This is the amount up to which you will not need to pay any inheritance tax on your estate. Anything above this amount will be subject to a 40% tax.

What is Taper Relief?

Taper relief is a reduction on the amount of inheritance tax payable on a gift that is made within 7 years of the donor’s death. However, it does not reduce the overall value of the gift; it is only applicable to the tax on that gift. As a result, if there is no tax to pay on a gift in the first instance, then you can’t claim taper relief to reduce the value of said gift.

Taper relief reduces the amount of inheritance tax due on a gift on a sliding scale. The rate at which this relief is applied is shown on the table below.

 

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%

It is important to remember that gifts always use up the inheritance tax threshold before any assets or property you leave behind. This means that 7 years will have to elapse before inheritance tax is payable if your estate and gifts exceed the IHT allowance. Furthermore, gifts are removed from your IHT calculation 7 years after the date the gift was made.

Case Study 1:

Mr Smith gifts £50,000 to his son in March 2017, and then gifts him a further £50,000 in September 2019. He dies in July 2020 with an estate worth £100,000. There is no IHT to pay on his estate as it is under the £325,000 threshold.

Case Study 2:

Mr Smith gifts £50,000 to his son in March 2017, and then gifts him a further £50,000 in September 2019. He dies in July 2020 with an estate worth £210,000.

The total value of the gifts made within 7 years of Mr Smith’s death are below the IHT threshold of £325,000, leaving £225,000 of his IHT allowance remaining.

Case Study 3:

Mr Smith gifts £200,000 to his son in March 2014, and then gifts him a further £200,000 in September 2019. He dies in July 2020 with an estate worth £500,000.

The total amount of these gifts within 7 years of Mr Smith’s death was £400,000 and therefore over the standard threshold. This means that the gifts have used up the entire residence nil-rate band, meaning that the result is now liable to Inheritance Tax.

If you have any questions regarding your estate and any gifts you are planning to make, contact us at Thornton and Baines and we will help you through your personal situation. Visit our website at: https://inheritance-tax.co.uk/ to find our more about what we can do to help you.

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