Most people we speak to, that understand the basics of inheritance tax, think that when they make a gift, the inheritance tax payable reduces over time. Tapering down after the first three years and reducing each year until the seventh anniversary when it is zero.
This is called taper relief and the rate of IHT payable reduces from 40% in the first three years, to 32%, 24%, 16%, 8% and 0%.
Unfortunately most people won’t receive this valuable relief on their giving. The nuance that most people miss is that if you don’t survive seven years after making the gift, the Nil Rate Band is used on the gift first and not on the remaining estate.
If you make a gift of £300,000 and don’t live seven years, the gift uses up the first £300,000 in full of the nil rate band of £325,000. So the estate only has £25,000 to offset against the estate for the IHT calculation. So in effect 40% tax is paid on £300,000 (£120,000 IHT) even though you might have survived into the taper period of 3-7 years.
In practice what this means is that you only benefit from taper relief for gifts of more than £325,000 and even then the relief only applies to the amount over the £325,000 band.
This is much less generous than most people realise and often comes as a shock when we explain it.
As the majority of gifts made in the UK are below £325,000, taper relief is rarely used.
We are currently hard at work, doing our best to reduce our clients’ inheritance tax exposure in the face of the big hikes to this tax in 2026 and 2027. If you want to discuss this further please contact us via our Hook office.