Inheritance tax taper relief reduces the rate of tax charged on lifetime gifts when the person who made the gift dies between three and seven years after making it. The rate slides from the full 40% down to 8%, depending on how long the donor survived. The relief only ever applies to the part of a gift that sits above the £325,000 nil rate band, so many gifts that seem to qualify on timing produce no tax saving at all.
Why Taper Relief Exists: The Seven-Year Rule
A gift you make during your lifetime is treated as a potentially exempt transfer, or PET. Survive seven years from the date of the gift and it falls out of your estate entirely. Die before those seven years are up and the gift fails, meaning it gets pulled back into the inheritance tax calculation on your death.1Legislation.gov.uk. Inheritance Tax Act 1984 – Section 3A The clock starts when the recipient actually takes possession of the money or asset.
Taper relief is the compromise built into that rule. If you almost make it to seven years, the tax charge is scaled back. If you die within three years of the gift, no taper applies and the full death rate hits.
The Taper Relief Rates
The relief works on a sliding scale tied to the number of complete years between the gift and the donor’s death.2GOV.UK. Inheritance Tax: gifts – Taper relief
- Less than 3 years: 40% (no relief)
- 3 to 4 years: 32%
- 4 to 5 years: 24%
- 5 to 6 years: 16%
- 6 to 7 years: 8%
- 7 years or more: 0% (the gift is fully exempt)
These figures come from Section 7 of the Inheritance Tax Act 1984, which sets taper as a percentage of the full death rate: 80%, 60%, 40%, and 20% for each successive year band beyond the third.3Legislation.gov.uk. Inheritance Tax Act 1984 – Section 7 Because the death rate is 40%, those percentages translate to the effective rates above. Surviving past the five-year mark is where the savings become substantial.
The Nil Rate Band Comes First, and It Changes Everything
This is the point where most people underestimate taper relief. The relief reduces the rate of tax; it does not reduce the value of the gift. And before any tax gets calculated, the £325,000 nil rate band is applied to gifts in chronological order, starting with the oldest gift inside the seven-year window.4GOV.UK. Inheritance Tax nil-rate band, residence nil-rate band from 6 April 2028
If a failed gift falls entirely within the available nil rate band, there is no tax to charge on it. Taper relief in that situation does nothing, because there is nothing to reduce. Taper only bites on the slice of a gift that pushes past the threshold.
Because the band is applied oldest first, an early gift can absorb most of the allowance and leave a later gift fully exposed. Someone who gave £200,000 four years before death and then £250,000 two years before death would use £200,000 of the £325,000 band on the first gift. Only £125,000 remains for the second, so £125,000 of that later gift is taxable at the full 40% rate (because the donor died within three years of it). The earlier gift, meanwhile, produces no tax at all, so the fact that it would qualify for taper is beside the point.
The nil rate band has been frozen at £325,000 and will stay there until at least the end of the 2029-30 tax year. The residence nil rate band of £175,000 does not apply to lifetime gifts. It only reduces the tax on your estate at death when a qualifying home passes to direct descendants.
A Worked Example
HMRC’s own manual runs through a scenario along these lines.5GOV.UK. HMRC Inheritance Tax Manual – IHTM14612
Julia gives £375,000 to her daughter in February 2022 and dies in June 2025. She made no other gifts in the seven years before that. The first £325,000 uses up her nil rate band. The remaining £50,000 is taxable. At the full 40% rate, the tax on that excess would be £20,000.
Julia died more than three but less than four years after the gift, so taper applies at 80% of the full death rate. The tax becomes £20,000 × 80% = £16,000. Taper relief saves £4,000.
Had she lived another two years and died in the five-to-six-year band, the rate would fall to 40% of the full charge. The bill would drop to £8,000, a £12,000 saving. Notice that in both cases the £375,000 gift value stays whole; only the tax rate on the £50,000 excess moves.
Exemptions That Apply Before Any Gift Enters the Seven-Year Rule
Some gifts never become PETs at all because standing exemptions strip them out first. Using these is the cheapest form of planning available.6GOV.UK. Inheritance Tax: gifts
- Annual exemption of £3,000 per tax year, with one year’s unused portion carried forward.
- Small gifts of up to £250 per recipient per tax year, so long as the recipient has not also received a share of the annual exemption from you.
- Wedding or civil partnership gifts of up to £5,000 from a parent, £2,500 from a grandparent, and £1,000 from anyone else.
- Normal expenditure out of income: regular gifts made from income (not capital) that leave you able to maintain your usual standard of living, with no upper cap.7Legislation.gov.uk. Inheritance Tax Act 1984 – Section 21
Only the part of a gift above these exemptions starts the seven-year clock. Give £6,000 in a tax year and £3,000 (or £6,000, if you have last year’s exemption available too) drops out before the PET rules apply.
Gifts You Keep Using Do Not Qualify
Taper relief cannot save a gift that never really left your estate. If you give something away but continue to benefit from it, the Finance Act 1986 treats it as a gift with reservation of benefit, and the property is deemed to remain part of your estate on death.8Legislation.gov.uk. Finance Act 1986 – Section 102 The textbook example is transferring your house to your children but continuing to live in it rent-free. The seven-year clock does not run at all in that situation. Paying full market rent can resolve the reservation, but informal family arrangements where the donor keeps practical use will not.
Who Actually Pays the Tax
The recipient of a failed gift is primarily liable for the inheritance tax on it.9GOV.UK. HMRC Inheritance Tax Manual – IHTM30052 That catches families off guard. Someone who received a generous gift years earlier can face a bill they never expected if the donor dies before the seven years are up. A will can direct the estate to pay instead, but without that direction the recipient bears the cost. It is worth discussing openly at the time of a large gift, because the recipient may need to hold funds back or take out term insurance to cover the risk.
Reporting the Gifts and Paying the Tax
The personal representative must report every gift made in the seven years before death. Schedule IHT403 captures each asset given, the date of the gift, and its market value at that date.10GOV.UK. Inheritance Tax: gifts and other transfers of value (IHT403) It goes in with the main inheritance tax account on Form IHT400.11GOV.UK. Inheritance Tax account (IHT400)
Contemporaneous records make this workable. Bank statements, valuations, and any letter or note confirming the gift should be kept during the donor’s lifetime. Reconstructing dates and values years later, without paperwork, is difficult, and HMRC does not accept round estimates.
Tax on the estate, including tax on failed gifts, is due by the end of the sixth month after the month of death. A death in January means a 31 July deadline.12GOV.UK. Pay your Inheritance Tax bill Interest on late payment currently runs at 7.75%.13GOV.UK. HMRC interest rates for late and early payments