When someone dies and leaves their assets, an inheritance, to beneficiaries (usually family and friends), they are liable to pay Inheritance Tax (IHT) based on the value of those assets, the deceased’s estate. There are certain tax thresholds and tax reliefs that can be applied which can reduce the amount of IHT to be paid.
One of these tax reliefs is Inheritance Tax Taper Relief, and is applied to any ‘gifts’ the deceased made to family and friends before they died. Also known as the ‘7-Year Rule, what are the criteria for Inheritance Tax Taper Relief and how does it work?
What is Inheritance Tax Taper Relief?
IHT taper relief isn’t strictly speaking a tax relief. In reality, it only reduces the amount of tax payable on an asset, not the value of the asset. For example, if there isn’t any tax to pay on the gift, it is not possible to claim taper relief.
This means that any gift which is part of the IHT threshold, known as the Residence Nil Rate Band (RNRB) – which currently sits at £325,000 per person or £650,000 if it has been transferred to another person – is not subject to tax.
IHT taper relief can only be applied if:
- The gift was made over three years but less than seven years prior to the deceased’s death.
- Tax is payable on the gift in its own right, which usually means it is a ‘gift with a reservation’, i.e. the gift is still in use and therefore considered part of the estate.
How does it work?
Any gifts that are given prior to death and subject to IHT; however, how much IHT the receiver of the gift pays depends on how many years before death the gift was given, i.e. it is tapered.
If the gift was given within three years before death, it would be subject to the full IHT tax rate because the taper relief percentage doesn’t start until three years have passed. The taper relief percentages are as follows:
|Period between date of gift and donor’s death||Taper relief percentage applied||Rate of tax on gift|
|0 – 3 years||0%||40%|
|3 – 4 years||20%||32%|
|4 – 5 years||40%||24%|
|5 – 6 years||60%||16%|
|6 – 7 years||80%||8%|
If the gift was made more than seven years after death, in most cases, there will be no IHT to pay. The value of any lifetime gift is the first subject to the nil rate band threshold of £325,000. It is the amount remaining that can benefit from Inheritance Tax Taper Relief as long as it was gifted at least three years prior to death.
Lifetime gifts that have a value that is below the nil rate band will not benefit from IHT taper relief. In addition, the deceased’s estate will only benefit from the remaining amount of the threshold after the gift’s value has been deducted.
What qualifies as a gift?
A gift includes
- Personal items, such as jewellery or antiques.
- Household items, such as furniture.
- Property, including a house, buildings or land.
- Stocks and shares, as listed on the London Stock Exchange.
- Unlisted shares, i.e. shares in an unlimited company, if you have held them for less than two years prior to your death.
- Money; this also includes money that is left over should you sell a gift for less than it is worth. For example, if you sell your property to a spouse or child for less than the market value, the monetary difference is considered a gift.
There are some ‘gifts’ you can make which may reduce the level of inheritance tax payable and, in some cases, result in no tax needing to be paid, such as gifts made to charities or political parties. Gifts made to your spouse/civil partner during your lifetime are exempt from inheritance tax but only if you are legally married or in a civil partnership and they live permanently in the UK.
Everyone is entitled to make a gift up to £3,000 in any tax year, which isn’t added to your estate and is therefore liable for IHT. This is called an ‘annual exemption’, and the gift can be made to one person or distributed between different people. This gift amount can also be carried forward to the next tax year, but only for one year.
The inheritance tax-exempt rule is also applicable to annual birthday or Christmas gifts, up to the value of £250. You can also gift money towards a wedding or civil partnership ceremony. The level of gift can be
- Up to £5,000 to a child.
- Up to £2,500 to a grandchild or a great-grandchild.
- Up to £1,000 to anyone else.
In addition, you are allowed to combine gifts, such as a wedding gift and another allowance, as long as it is for the same person and the other allowance is not the small gift allowance.
You are also entitled to make regular gift payments to help towards somebody else’s living. Called ‘normal expenditure out of income, there isn’t a limit to how much you give as long as you can afford the payments after you have met your own living costs, and it comes from your monthly income. This type of gift can include:
- Making rent payments for your child.
- Paying money into a savings account for a child that is under 18 years of age.
- Providing financial support for an elderly relative.
These gifts can also be combined with other tax relief allowances, such as your annual £3,000 ‘annual exemption’ gift.
If you are giving gifts prior to your death, it is important to keep a full and detailed record of the gifts you have made, including
- Who you gave them to and what you gave.
- The value of the gift.
- When you gave the gift.
The executors of your estate or solicitor that is handling the administration of your estate following your death, will need to know the details of the gifts you made in the seven years prior to your death so that they can calculate how much IHT is due on your estate.
At Probates Online, we offer a will writing service or a Complete Estate Service to help you through the probate process and estate administration upon the death of a loved one. If you are looking for advice on inheritance tax, gifts or trusts, or need to apply for Grant of Probate, Letters of Administration or would like to take advantage of our entire Estate Administration service, visit our website for more information or contact us today.