IHT Taper Relief UK (2026): How Inheritance Tax Reduces on Gifts Made 3–7 Years Before Death

Taper relief is a reduction in the inheritance tax payable on gifts made between 3 and 7 years before the donor's death. It does NOT reduce the value of the gift: (1) THE MISUNDERSTANDING: many people believe that if they survive 5 years after making a large gift, the gift value is 'reduced by 60%' or is 'only 40% chargeable'. This is completely wrong. The gift value is still fully counted in the IHT calculation. What tapers is the RATE OF TAX applicable to the amount of the gift that exceeds the available nil-rate band; (2) THE CORRECT POSITION: taper relief reduces the percentage of the full IHT charge (40%) that is applied to the EXCESS above the NRB on a failed PET or CLT. The schedule under IHTA 1984 Schedule 1 is: (a) 0 to 3 years before death: 100% of the full charge (effective rate 40%); (b) 3 to 4 years: 80% of the full charge (effective rate 32%); (c) 4 to 5 years: 60% of the full charge (effective rate 24%); (d) 5 to 6 years: 40% of the full charge (effective rate 16%); (e) 6 to 7 years: 20% of the full charge (effective rate 8%); (f) 7 or more years before death: 100% exempt — no IHT; (3) WHEN DOES TAPER RELIEF ACTUALLY HELP: taper relief only matters if the gift EXCEEDS the available nil-rate band. If the total of the gift plus any earlier chargeable transfers in the 7 years before the gift is less than £325,000, there is no IHT on the gift regardless — the NRB absorbs it. Taper does not reduce the NRB calculation — it only reduces the tax on the excess; (4) THE PRACTICAL EFFECT: for gifts just above the NRB threshold, the tax saving from taper relief is modest. For very large gifts (several million pounds), taper relief after 5+ years produces significant IHT savings — but the NRB allocation still matters. Taper is most powerful when the gift is large and isolated — no previous chargeable transfers in the 7-year cumulative period.

The NRB is applied to the oldest gifts first — and only IHT on the excess above the NRB tapers. This FIFO allocation has important consequences when multiple gifts are made over the 7-year cumulation period: (1) THE 7-YEAR CUMULATION WINDOW: IHTA 1984 s.7 — when calculating IHT on a gift (or on the death estate), any chargeable transfers made in the 7 years before that gift are aggregated. The NRB is applied to the oldest transfers first; (2) EXAMPLE — SINGLE LARGE GIFT: A (aged 65) gifts £700,000 to a friend. A dies 5 years and 2 months later. A made no other gifts in the preceding 7 years. Available NRB = £325,000. Chargeable excess = £375,000. Full IHT = £150,000 (40%). Taper: gift made 5-6 years before death = 40% of full charge. IHT payable = £60,000 (effective rate on the gift = 8.6%); (3) EXAMPLE — EARLIER GIFTS ABSORB THE NRB: B made a gift of £325,000 to a discretionary trust 4 years ago (a CLT). Now B makes a gift of £400,000 to a friend (PET). B dies 5 years after the PET. The CLT 4 years earlier used up the NRB entirely. On the PET: the NRB has been used by the earlier CLT. All £400,000 is chargeable. Taper: PET made 5-6 years before death = 40% of full charge. IHT = £400,000 × 40% × 40% = £64,000. WITHOUT taper (if B had died between 3-4 years after the PET), the IHT would have been £400,000 × 40% × 80% = £128,000; (4) THE 7-YEAR CUMULATION ON EARLIER CLTs: the CLT made 4 years ago also falls within the 7-year window from B's death. It will be recalculated at the death rate (40%) subject to taper (CLT made 4 years ago = 4-5 years before death = 60% of full charge). Death rate IHT on CLT = £325,000 × 40% × 60% = £78,000. But wait — the £325,000 CLT is all within the NRB, so no IHT on it even at the death rate. The NRB absorbs it. Only the excess is taxed and tapered; (5) KEY PLANNING POINT: multiple gifts over different years can produce complex interactions. The key is that the NRB is used up by the OLDEST transfers first. If older gifts exhaust the NRB, all subsequent gifts (including PETs made years later) become fully taxable above the NRB — taper then provides relief on the tax, but the NRB is not available a second time.

The taper relief mechanics apply slightly differently to PETs and CLTs: (1) POTENTIALLY EXEMPT TRANSFERS (PETs): (a) A PET is a gift by an individual to another individual (or to a bare trust). It is exempt from IHT while the donor is alive; (b) If the donor dies within 7 years, the PET becomes chargeable — it falls back into the estate as a 'failed PET'; (c) IHT is calculated on the failed PET based on the 7-year cumulation position at the date of the gift (not at the date of death); (d) Taper relief then reduces the IHT payable based on how many years elapsed between the date of the PET and the date of death; (e) THE DONEE IS PRIMARILY LIABLE: the recipient of a failed PET is primarily liable for the IHT — not the deceased's estate. HMRC will go after the donee. If the donee cannot pay, the estate is secondarily liable; (2) CHARGEABLE LIFETIME TRANSFERS (CLTs): (a) A CLT is a gift to a discretionary trust (or a few other taxable structures). It is immediately chargeable to IHT at a lifetime rate of 20% (half the death rate) on amounts above the NRB; (b) If the donor dies within 7 years, the CLT is recalculated at the full death rate (40%). A credit is given for the 20% already paid at the lifetime rate; (c) Taper reduces the death-rate charge on the CLT. If taper reduces the effective rate below 20%, the difference is the net additional tax payable; (d) EXAMPLE: CLT of £425,000 made 5.5 years before death. NRB = £325,000. Lifetime IHT paid = 20% × £100,000 = £20,000. Death rate calculation: taper at 5-6 years = 40% of full charge. Death rate IHT = £100,000 × 40% × 40% = £16,000. Since £16,000 < £20,000 (lifetime tax already paid), no additional IHT is payable at death. The taper reduces the charge below the lifetime rate — a 'credit surplus'. No refund is given (IHTA 1984 s.7(5)); (3) GIFTS WITH RESERVATION: where property is given away but the donor retains a benefit (e.g. continues to live in a gifted property rent-free), the gift is not a PET — it is a 'gift with reservation' under FA 1986 s.102. The property remains in the donor's estate at death as if it were never given away. Taper relief does NOT apply to gifts with reservation (they are treated as part of the death estate, not as failed PETs or CLTs).

The liability rules for taper-reduced IHT on failed PETs are important for both estate planning and executor administration: (1) PRIMARY LIABILITY — THE DONEE: where a PET fails because the donor died within 7 years, the person who received the gift (the donee) is primarily liable to pay the IHT under IHTA 1984 s.199(1)(b). HMRC can and does pursue the donee directly for the tax. If the donee has already spent the money, they are still liable — they may need to sell other assets to pay; (2) SECONDARY LIABILITY — THE ESTATE: if the donee cannot pay (or refuses to pay), HMRC may pursue the deceased's personal representatives for the IHT on the failed PET out of the estate under IHTA 1984 s.200(1)(c). The estate can seek reimbursement from the donee but may face practical difficulties if the donee is impecunious; (3) THE EXECUTOR'S DUTY TO REPORT: executors must report all failed PETs on the IHT account (IHT400, Schedule IHT403). They must identify all gifts made in the 7 years before death, including informal gifts. Failure to report accurately can result in penalties; (4) HOW TAPER AFFECTS WHO PAYS WHAT: if the failed PET was made 5-6 years before death and the excess above NRB is £200,000, the IHT is £200,000 × 40% × 40% = £32,000. This £32,000 is the donee's primary liability. The estate is secondarily liable; (5) PRACTICAL SCENARIOS: (a) Donee has the money — most common; HMRC issues notice to the donee; (b) Donee has spent the money — HMRC may pursue the estate; estate pursues the donee by civil action; (c) Donee predeceased the donor — the PET never became chargeable (donor outlived donee — actually, if the donor outlives the donee, the PET becomes chargeable on the DONOR's death — the donee's estate is no longer available; the donor's estate pays; unusual scenario); (d) Multiple donees — HMRC allocates proportionately; (6) WILL DRAFTING — INDEMNITY CLAUSES: it is possible to include a clause in the will directing the estate to pay the IHT on any failed PETs, rather than pursuing the donee. This is a gift in itself (the indemnity) — which may itself be subject to IHT. It should be considered carefully as part of the overall estate plan.

Annual exemptions and other IHT exemptions reduce the chargeable value of a transfer BEFORE taper relief is calculated — they sit at a different level of the IHT computation: (1) ANNUAL EXEMPTION (IHTA 1984 s.19): £3,000 per donor per tax year, plus £3,000 carried forward from the prior year (if unused). The annual exemption is deducted from the transfer VALUE before deciding whether a PET or CLT is made. EXAMPLE: gift of £10,000 on 15 May 2020. Annual exemption used = £3,000. Chargeable transfer = £7,000. If the donor dies 4 years later: the CHARGEABLE AMOUNT of £7,000 (not the full £10,000) is the PET that potentially falls into the IHT calculation. Taper relief applies to the IHT on the £7,000 excess above the NRB — though if the NRB is available, the £7,000 is absorbed and there is no IHT and no taper; (2) NORMAL EXPENDITURE FROM INCOME (IHTA s.21): gifts out of surplus income that are habitual and do not reduce the donor's living standard are exempt — with no upper limit. These are NOT chargeable transfers at all (not PETs, not CLTs). They are not cumulated in the 7-year window. Taper relief never applies to them — they are fully exempt; (3) SMALL GIFTS EXEMPTION (IHTA s.20): £250 per recipient per year. Exempt — not a chargeable transfer. Never enters taper calculations; (4) MARRIAGE GIFT EXEMPTIONS (IHTA s.22): gifts on occasion of marriage are exempt up to £5,000 (parent to child), £2,500 (grandparent/other relative to grandchild), £1,000 (anyone else). Exempt. Not chargeable. Taper does not apply; (5) SPOUSE/CIVIL PARTNER EXEMPTION (IHTA s.18): gifts to UK-domiciled spouses/CPs are fully exempt — no IHT, no taper, no 7-year running; (6) CHARITABLE EXEMPTION (IHTA s.23): gifts to qualifying charities are exempt. No IHT, no taper; (7) THE PLANNING IMPLICATION: making use of all available exemptions first, THEN making taxable gifts, means the taxable gift value is minimised. If the remaining gift after all exemptions is within the NRB, there is no IHT even if the donor dies within 3 years. Taper only becomes relevant for large gifts above the NRB — typically unplanned large family gifts or transfers to trusts.