Taper relief on IHT explained: How it works and when it applies

Whilst taper relief can reduce the Inheritance Tax bill on gifts in the right circumstances, many families discover they won’t qualify for the relief. Understanding why and when taper relief applies is essential to making informed gifting decisions and can help put you on the right path to managing your own Inheritance Tax position.

This article answers: What is taper relief for Inheritance Tax purposes? How does taper relief work on gifts for Inheritance Tax? Which gifts qualify for taper relief on Inheritance Tax? How long after a gift is taper relief applied? Does taper relief reduce the amount of tax or the value of the gift?

What is taper relief on IHT?

Taper relief on IHT is a means of reducing the Inheritance Tax payable on certain gifts made during someone’s lifetime. Taper relief Inheritance Tax may apply where:

• The donor has died within seven years of making the gift;
• The donor survived for more than three years after making the gift; and
• Cumulative chargeable gifts exceed the available nil rate band, so tax is due on the excess.

In principle, Inheritance Tax gifts taper relief works by reducing the tax payable by a percentage, but not the value of the gift to assess against the nil rate band. The amount of tax paid depends on how close the donor was to the ‘seven year’ threshold, reducing over years three to seven. In other words, taper relief on IHT reduces the tax, not the gift’s value.

IHT taper relief table: rates of taper relief 

These percentages are commonly shown in an IHT taper relief table to illustrate how Inheritance Tax gifts taper relief is applied over time.

The misconceptions of taper relief

When considering how taper relief might apply to their own circumstances, clients are often misinformed how it works.

They believe taper relief is available on all gifts made within seven years.

In reality, taper relief Inheritance Tax will only apply on the proportion of gifts made in excess of the available nil rate band (usually £325,000), where Inheritance Tax would be payable on the gift itself. Additionally, the donor must have survived at least three years after the gift was made.

They believe taper relief reduces the value of the gift itself.

This is incorrect. The full value of the gift is considered when calculating how much nil rate band has been used, and how much tax there is to pay. Taper relief is then calculated as a percentage of the tax due on the excess gifts above the nil rate band. Put simply, taper relief on IHT reduces tax, not value, and the above IHT taper relief table makes this clear.

So what does this mean? Ultimately, many people making gifts will never receive a benefit from taper relief, because most people do not make gifts in excess of their available nil rate band of £325,000. What can be especially frustrating is that the gift can still use up the nil rate band for seven years, reducing the exemption that can be used against the rest of the estate. Where taper relief on IHT is available, it may not reduce the liability as much as many hope because it still considers the full value of the gift, simply reducing the tax payable based on a percentage of the tax due.

This is best demonstrated with some examples; let’s take a look at taper relief in practice. These examples assume straightforward outright gifts to individuals, no other gifting exemptions are available, no earlier relevant transfers, no transferable nil rate band and a 40% Inheritance Tax rate.

Taper relief on IHT examples

To help illustrate how taper relief works in practice, our Inheritance Tax specialist, Paul Simmons, outlines three common scenarios and their potential Inheritance Tax implications.

Taper relief example 1

Sophie makes a gift in January 2020 of £150,000 to her son. She passes away in February 2026.

Sophie passed away within seven years of making the gift. However, the gift is less than her available nil rate band of £325,000, therefore, there is no tax to pay. No taper relief is available because no tax is due on the gift itself.

The gift uses up £150,000 of her £325,000 nil rate band, so £175,000 of her nil rate band remains available against her remaining estate.

Taper relief example 2

James makes a gift of £400,000 to his children in August 2021. He passes away in November 2025 having made no other significant gifts. The £400,000 gift is in excess of his available nil rate band (£325,000) by £75,000.

Inheritance Tax before taper relief is £30,000, calculated as 40% of the £75,000 excess. Because James survived the gift by between four and five years, taper relief reduces the tax to 60% of that tax; the amount remaining payable is: 60% x £30,000 = £18,000.

Separately, because the gift has used James’s nil rate band, none of it remains available against his estate on death within seven years. If at least £325,000 of his remaining estate is otherwise taxable, this could increase the Inheritance Tax on the estate by up to £130,000.

Taper relief example 3

It is important to note that the value of gifts made in the seven years up to the donor’s death will be added together, to inform just how much these gifts exceed the available nil rate band. Taper relief is applied chronologically, considering the gifts in date order, starting with the earliest, to determine when the available nil rate band is exhausted and when tax might apply.

Susan made the following significant gifts during her lifetime:

• £100,000 in January 2020
• £200,000 in January 2021
• £100,000 in January 2022

She passed away in December 2025. The first £325,000 of gifts made will use her available nil rate band, leaving £75,000 of the January 2022 gift subject to Inheritance Tax at 40% (£30,000). As Susan survived that gift by between three and four years, 80% of the full tax remains payable. 

The tax payable is 80% of £30,000 = £24,000. Susan will have no further nil rate band to use on the remainder of her estate. If instead Susan dies after January 2027, then the first gift falls out of the seven-year period, while the two later gifts remain within it; those later gifts would total £300,000. On the assumptions used here, these gifts are within her nil rate band, no tax would be due on the gifts themselves and taper relief would not apply.

These examples provide useful context; although inherited nil rate band, gifting exemptions, lifetime gifts into trusts and other nuances can all make the position of taper relief more complicated and dependent on each individual’s circumstances.

What taper relief means for gifting decisions

Whilst taper relief may not be relevant for many and does not provide as much relief as the headline may suggest, it is a powerful tool for those that are looking to make significant gifts in their lifetime. In the right circumstances, gifting is still an effective way to reduce your Inheritance Tax liability, and understanding the various options in this regard is incredibly important. Reviewing an IHT taper relief table and the rules around Inheritance Tax gifts taper relief can clarify when relief applies and how long after a gift it is applied (from year three up to year seven).

Inheritance Tax is a complicated and detailed area of financial planning; understanding how gifting, exemptions, trusts and other planning opportunities fit together can make a significant difference to the amount ultimately passed on to your loved ones.

If you would like to discuss your own Inheritance Tax position or explore the planning options available to you, please get in touch with one of our advisers.