Inheritance Tax Taper Relief UK (2026): How Gifts Between 3 and 7 Years Are Taxed

Inheritance tax taper relief is a statutory reduction in the rate of IHT charged on gifts made between 3 and 7 years before the donor's death. It is governed by IHTA 1984 s.7(4): (1) THE BASIC RULE — POTENTIALLY EXEMPT TRANSFERS (PETs): a gift from one individual to another (a PET — potentially exempt transfer under IHTA 1984 s.3A) is entirely IHT-free if the donor survives 7 years from the date of the gift. If the donor dies within 7 years, the gift becomes chargeable to IHT. If the donor dies within 3 years, the full 40% IHT rate applies. If the donor dies between 3 and 7 years, taper relief reduces the IHT rate; (2) THE TAPER RELIEF SCALE (IHTA 1984 s.7(4)): the relief is applied as a percentage reduction of the 40% rate: Years between gift and death → Taper relief percentage → Effective rate: Under 3 years → 0% taper → 40% IHT rate; 3-4 years → 20% taper → 32% rate; 4-5 years → 40% taper → 24% rate; 5-6 years → 60% taper → 16% rate; 6-7 years → 80% taper → 8% rate; 7+ years → Fully exempt → 0% rate; (3) THE CRITICAL MISUNDERSTANDING: taper relief reduces the rate of tax, NOT the value of the gift. The gift is still counted in full when calculating how much NRB remains. This distinction is essential for the NRB interaction explained in Q2; (4) WHO PAYS THE IHT ON A FAILED PET: when a PET fails (the donor dies within 7 years), the primary liability to pay the IHT falls on the recipient of the gift. If the recipient cannot or will not pay, the liability falls on the executor/personal representative from the estate. The HMRC can pursue either party; (5) CHARGEABLE LIFETIME TRANSFERS (CLTs): taper relief also applies to CLTs (gifts to certain trusts) if the donor dies within 7 years of the CLT. The CLT was already charged to IHT at 20% on creation. On death within 7 years, HMRC recalculates at the death rate (40%), applies taper, and charges the difference (after crediting the 20% already paid on creation).

Taper relief only saves IHT when the failed gift exceeds the available nil-rate band at the date of death. This is frequently misunderstood: (1) THE NRB RULE: gifts are added to the estate and the NRB (£325,000) is applied first against gifts in chronological order (oldest first). Taper relief can only apply to the portion of a gift that exceeds the NRB. If the gift falls within the NRB, there is no IHT on it — and therefore nothing for taper relief to reduce; (2) EXAMPLE A — TAPER RELIEF SAVES TAX: donor gives £500,000 to daughter 4.5 years before death. Donor dies with an estate of £100,000. NRB: £325,000. The £500,000 gift exceeded the NRB by £175,000. IHT on the excess without taper: £175,000 × 40% = £70,000. The gift was made 4-5 years ago: 40% taper relief applies. IHT payable: £70,000 × (1-0.40) = £42,000. Tax saving from taper: £28,000. Note: the estate of £100,000 is below the remaining NRB (£325,000 - £500,000 = £0 remaining NRB; estate is treated as having £0 NRB remaining). But the estate itself falls within what remains — so 40% on the estate would have applied too. This is a complex calculation; always take professional advice; (3) EXAMPLE B — TAPER RELIEF DOES NOT SAVE TAX: donor gives £200,000 to son 5 years before death. Donor dies with estate of £50,000. NRB: £325,000. Total chargeable transfers: £200,000 + £50,000 = £250,000. This is below the NRB. No IHT on either gift or estate. Taper relief is irrelevant — there is no tax to reduce; (4) EXAMPLE C — THE DANGEROUS MISCONCEPTION: many people believe that a gift made 5 years before death will be subject to only 16% IHT. This is only true if the gift exceeds the NRB. If it falls within the NRB, the effective IHT rate is 0% — taper is irrelevant. If the same person makes a gift of £250,000 (within NRB) and dies 5 years later, the gift is not taxed at all. Taper relief provided no benefit — the NRB exempted the gift entirely; (5) THE 7-YEAR RULE IS STILL VALUABLE: even though taper relief is often less powerful than people expect, the 7-year rule remains the most widely available IHT planning tool. Gifts of any amount made more than 7 years before death are fully exempt — no IHT regardless of size. The NRB interaction and taper relief only matter for gifts made in the 7 years before death.

Taper relief applies only to chargeable transfers — gifts that would otherwise attract IHT. Gifts that are already IHT-exempt under other provisions are not subject to IHT and taper relief never comes into play: (1) TAPER RELIEF AND THE ANNUAL EXEMPTION (S.19 IHTA 1984): the annual exemption (£3,000 per year; carry forward 1 year only to max £6,000) removes gifts from the IHT charge entirely. Gifts covered by the annual exemption are not PETs — they are exempt transfers. Taper relief does not apply to them; (2) TAPER RELIEF AND SMALL GIFTS (S.20): same principle — small gifts to any one recipient up to £250 per year are exempt. Taper is irrelevant; (3) TAPER RELIEF AND NORMAL EXPENDITURE OUT OF INCOME (S.21): gifts from surplus income that qualify under s.21 (regular gifts; from income not capital; maintain donor's lifestyle) are exempt immediately. Not PETs. Taper irrelevant; (4) TAPER RELIEF AND SPOUSE EXEMPTION (S.18): gifts between spouses or civil partners are entirely exempt. Taper never applies; (5) TAPER RELIEF AND PETs: the only transfers to which taper relief applies are PETs that fail (the donor dies within 7 years) and CLTs that attract an additional death charge. A PET is a gift from an individual to another individual (or to a bare trust) — it must not be covered by any specific exemption. The net value of the gift after applying exemptions is the PET amount subject to taper if the donor dies within 7 years; (6) INTERACTION WITH ANNUAL EXEMPTION: if a donor makes a gift of £10,000 and the first £3,000 is covered by the annual exemption, the PET is only £7,000 (the excess). Taper only applies to the £7,000 PET portion if the donor dies within 3-7 years. The annual exemption portion is exempt regardless.

The interaction between multiple gifts, the NRB, and taper relief is one of the more complex areas of IHT: (1) THE CUMULATION RULE: for IHT purposes, all chargeable transfers (PETs that failed + CLTs) made in the 7 years before death are added together and the NRB is applied cumulatively, with the oldest gifts using the NRB first. Example: donor makes gift A of £200,000 (year 1) and gift B of £150,000 (year 5), then dies (year 6). NRB: £325,000. Gift A and Gift B total £350,000. Applying NRB first to Gift A (£200,000) — absorbs £200,000 of NRB. Remaining NRB: £125,000. Apply remaining NRB to Gift B: £125,000 of Gift B is within NRB (£0 IHT). £25,000 of Gift B exceeds NRB. IHT on £25,000 at Gift B's taper rate (5-6 years: 80% taper; effective rate 8%): £25,000 × 8% = £2,000. Gift A: made 5 years before death — 60% taper; effective rate 16%. But Gift A is entirely within the NRB (£200,000 out of £325,000) — 0% IHT regardless of taper; (2) ESTATE AT DEATH GETS WHATEVER NRB REMAINS: after cumulating all gifts in the prior 7 years, any remaining NRB is applied to the estate. If the gifts have exceeded the NRB, the estate is fully exposed to 40% IHT. If the gifts have not used up the NRB, the estate gets the balance; (3) RESIDENTIAL NRB ADDS ON TOP: the RNRB (£175,000/person; £350,000 for a couple via transferable RNRB) is applied to the estate in addition to the NRB — but only if the home passes to a direct descendant. Gifts do not reduce the RNRB; (4) PROFESSIONAL ADVICE: where there are multiple gifts, different sizes, and a complex estate, a professional IHT calculation from an accountant or solicitor is essential. Minor errors in the sequence of application can produce materially different results.

The 7-year rule (and taper relief for 3-7 years) is valuable, but only if the donor plans and survives long enough: (1) THE VALUE OF THE 7-YEAR RULE: any PET becomes fully IHT-exempt if the donor survives 7 years. This makes outright gifts to individuals the most straightforward IHT planning tool — no specialist structure needed. For a person with a large estate who can afford to give away assets, the 7-year clock is the primary mechanism; (2) THE RISK: the donor must survive 7 years. If they die within 3 years, there is no taper benefit — the full 40% rate applies. If they die between 3 and 7 years, taper provides partial relief. The younger and healthier the donor when making the gift, the more confident they can be of surviving the 7 years; (3) GIFT ONLY WHAT YOU CAN AFFORD TO GIVE: a PET cannot be reversed. Once the gift is made, the donor no longer owns the assets. If the donor's financial circumstances deteriorate (long-term care costs; investment losses), they cannot reclaim the gift (except if there is a reservation of benefit — which negates the PET and brings the assets back into the estate under IHTA 1984 s.102); (4) RESERVATION OF BENEFIT: a gift with reservation of benefit (GWR) — where the donor continues to benefit from the gifted asset — does not work as a PET. Example: parent gifts house to child but continues to live in it without paying a market rent. This is a GWR — the house remains in the donor's estate for IHT regardless of the 7-year rule (s.102 IHTA 1984). The parent must pay full market rent for the gift to be effective; (5) COMBINATION WITH OTHER PLANNING: the 7-year rule works best as part of a wider plan: (a) Annual exemption gifts (£3,000/yr) — exempt immediately, no 7-year clock; (b) Normal expenditure out of income (s.21) — unlimited, exempt immediately; (c) Life insurance in trust — can fund the IHT bill if the donor dies within 7 years; (d) Deed of variation — can posthumously redirect the estate to reduce IHT; (e) BPR/APR — immediate relief on qualifying business and agricultural assets.