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Taper Relief

Also known as: IHT Taper Relief, Graduated Relief

Definition

Taper relief is a sliding-scale tax reduction on large gifts made 3-7 years before death, reducing the inheritance tax payable (not the gift's value) based on how long the donor survived.

This relief only applies when total gifts in the seven years before death exceed £325,000. The longer you survive after making the gift—up to seven years—the lower the effective tax rate, potentially saving tens of thousands of pounds for gift recipients.

What Does Taper Relief Mean?

Under the Inheritance Tax Act 1984, Section 7(4), taper relief provides a statutory mechanism for reducing inheritance tax on Potentially Exempt Transfers (PETs) that become chargeable due to death within seven years. When someone makes a substantial gift and dies before the full seven-year period elapses, the gift initially treated as exempt becomes subject to Inheritance Tax (IHT). Taper relief reduces the tax charged—not the value of the gift itself—based on the number of complete years the donor survived after making the gift.

The critical threshold is the nil-rate band, currently £325,000. Taper relief only applies if total gifts made in the seven years before death exceed this threshold. If your combined gifts are below £325,000, no inheritance tax is payable regardless of timing, making taper relief irrelevant. This distinction trips up many people who assume any gift made within the 3-7 year window automatically benefits from relief.

The relief operates on a precise sliding scale established by HMRC guidance. For gifts made less than three years before death, no relief applies and the full 40% inheritance tax rate is charged. Between three and seven years, the relief percentage increases with survival time. At 3-4 years, relief is 20%, reducing the effective tax rate to 32%. At 4-5 years, relief increases to 40%, creating a 24% effective rate. At 5-6 years, 60% relief brings the rate down to 16%. Finally, at 6-7 years, 80% relief results in just 8% effective tax. These percentages apply to the tax itself, not the gift value.

Consider Emma, who gifts her son £400,000 and survives five years and two months. The taxable amount is £75,000 (the gift exceeds the nil-rate band by this amount). With 60% taper relief at five complete years, the effective tax rate drops from 40% to 16%. Her son pays £12,000 in inheritance tax instead of £30,000—a saving of £18,000 purely because Emma survived five years. The gift value remains £400,000 throughout; only the tax calculation changes.

The "oldest gifts first" rule adds another layer of complexity. HMRC deducts the earliest gifts from the nil-rate band first when calculating tax liability. If you made multiple gifts, the first gift uses up the nil-rate band, potentially leaving no room for taper relief on subsequent gifts. David made two gifts: £200,000 four years before death and £300,000 two years before death. The older £200,000 gift consumes part of the nil-rate band first, leaving only £125,000 of the band for the second gift. The remaining £175,000 of the second gift becomes taxable at the full 40% rate with no taper relief, because only two complete years passed. This timing creates significantly different tax outcomes for each gift despite both falling within the seven-year period.

Common Questions

"My mother gave me £400,000 five years ago and has now died—how much inheritance tax will I have to pay?"

You'll pay inheritance tax on £75,000 (the amount above the £325,000 nil-rate band). With taper relief at five complete years, the tax rate is 16% instead of 40%, so you'll pay £12,000 rather than £30,000. Taper relief has saved you £18,000 in inheritance tax.

"I gave my daughter £280,000 three years ago—will taper relief reduce the inheritance tax if I die soon?"

No, because your gift is below the £325,000 nil-rate band, no inheritance tax is due regardless of taper relief. Taper relief only matters when total gifts in the seven years before death exceed £325,000. Your gift will be completely tax-free even with no relief.

"If I survive four years after making a £500,000 gift, how much tax will my son save compared to if I died within three years?"

With a £500,000 gift, the taxable amount is £175,000 (after the £325,000 nil-rate band). At four complete years, taper relief provides 40% reduction, making the tax rate 24% (£42,000) instead of 40% (£70,000). Surviving four years saves £28,000 in inheritance tax for your son.

Common Misconceptions

Myth: Taper relief reduces the value of my gift over time, so a £500,000 gift becomes worth less for inheritance tax purposes.

Reality: Taper relief reduces the tax rate charged on the gift, not the gift's value. A £500,000 gift remains valued at £500,000 for inheritance tax purposes. What changes is the tax percentage applied to the amount exceeding the nil-rate band—from 40% down to potentially 8% if you survive 6-7 years. The gift value itself never changes.

Myth: All gifts I made between three and seven years before death will benefit from taper relief.

Reality: Taper relief only applies if your total gifts in the seven years before death exceed £325,000. If your gifts total less than the nil-rate band, there's no inheritance tax to pay anyway, so taper relief is irrelevant. Additionally, the "oldest gifts first" rule means HMRC deducts your earliest gifts from the nil-rate band first, potentially leaving no tax—and thus no taper relief benefit—on later gifts.

Understanding taper relief connects to these related concepts:

  • Inheritance Tax (IHT): Taper relief is a mechanism for reducing inheritance tax liability on failed potentially exempt transfers.
  • Seven-Year Rule: Taper relief applies specifically to years 3-7 of the seven-year period; surviving seven full years eliminates inheritance tax completely.
  • Potentially Exempt Transfer (PET): Taper relief only applies to PETs that become chargeable due to death within seven years.
  • Nil-Rate Band: The £325,000 threshold that must be exceeded before taper relief becomes relevant to your situation.
  • Gift with Reservation of Benefit (GROB): Contrasting concept—gifts with reservation don't qualify for taper relief or PET treatment.

Need Help with Your Estate Planning?

Understanding taper relief is essential when planning substantial lifetime gifts. A properly structured will ensures your estate planning strategies, including gifting, work together to minimize inheritance tax for your loved ones.

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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal or tax advice. Inheritance tax calculations can be complex and depend on your individual circumstances. For advice specific to your situation, consult a qualified solicitor or tax adviser. Taper relief rates and nil-rate band thresholds are subject to change by government legislation. The figures stated here (£325,000 nil-rate band, 40% standard IHT rate) are correct as of October 2025 but should be verified with current HMRC guidance.