How to make use of Taper Relief for Inheritance Tax

As well as being the UK’s least popular tax, Inheritance Tax (IHT) is known by many as a thicket of exemptions and complexities. Anyone who has ever been involved in estate planning will know that navigating tax-free allowances, IHT exemptions and lifetime gifting rules is not simple. This post digs into the details of one such issue: Taper Relief for lifetime gifting.

Tax-free allowances

Inheritance Tax receipts for April 2024 to October 2024 rose to £5 billion, according to HM Revenue and Customs (HMRC), half a billion higher than the same period last year.

Making the most of tax-free allowances is therefore crucial to minimising the amount of Inheritance Tax paid. There are two allowances: the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB).

Nil Rate Band (NRB) allowance

The NRB allowance is available to any person holding assets in the United Kingdom and can be applied to fixed and non-fixed assets. The NRB allowance is currently worth £325,000. In effect, any assets up to the value of £325,000 are taxed at a rate of 0%.

Residence Nil Rate Band (RNRB) allowance

The RNRB allowance is applied to a residential property included in the deceased’s estate is left to one or more direct descendants. There are complex rules surrounding how this allowance is applied, especially in relation to downsizing or disposing of the property during lifetime. The RNRB allowance is worth £175,000.

Key IHT exemptions

As well as these allowances, there are certain IHT exemptions to know about. Exemptions mean that assets can be gifted to persons or organisations without paying any IHT.

Through the Charity exemption, UK-registered charities are exempt from IHT. This means that a gift to charity in your Will does not count towards the nil rate band, which reduces the taxable value of your estate.

Similarly, the Spousal or civil partner exemption means that any unused NRB and RNRB allowances upon the first death in a couple can be transferred to the estate of the surviving partner. Consequently, available allowances can total £650,000 (Nil Rate Band) and £350,000 (Residence Nil Rate Band) on the second death.

Lifetime gifting rules

Beyond allowances and exemptions, the most practical knowledge needed to navigate IHT are the rules related to lifetime gifting. There is no specific limit on how much you can give away in your lifetime. Gifting assets is a great way to reduce the value of your estate for IHT purposes. However, there are tax implications to keep in mind.

A gift during lifetime is known as a “Potentially Exempt Transfer” (PET) for IHT purposes. PETs operate with a 7-year rule. This means that any gift will fall outside of your estate for IHT purposes should you survive a period of 7 years from making the transfer. (There are other stipulations too, such as the fact that you must give up the benefit of the asset gifted.) In the event of you passing away within the 7-year period, however, the value of the gift will be taxable.

Where does Taper Relief come in?

In the case that lifetime gifts do become taxable, the rate you pay will depend on how long you survived after the gift was made. This is called Taper Relief.

The rates are as follows:

• 3 years before death: 40%
• 3-4 years: 32%
• 4-5 years: 24%
• 5-6 years: 16%
• 6-7 years: 8%

Gifting exemptions to the 7-year rule

That’s not all of it, though, because not all gifts count towards the 7-year rule.

For example, the first £3,000 transferred by gift in each tax year is exempt. Moreover, any unused annual exemption from the previous tax year can be carried forward for one tax year. A further exemption exists for small gifts, namely any gifts of £250 or less per recipient made during lifetime in any one tax year are exempt. Finally, normal expenditure out of income is exempt too. Importantly, these exemptions cannot be used in conjunction with the annual exemption.

Don’t struggle on alone!

Inheritance Tax is notoriously complex. Working out how best to navigate lifetime gifting and understanding the effects of Taper Relief in your unique circumstances is a challenge best approached with an expert lawyer in your corner.

At Attwaters Jameson Hill, our private client team is on hand to help you find the right solutions to protect your wealth. From estate planning and Wills to specialist trust advice, we can provide advice that spans your every IHT need. To discuss your personal circumstances with a lawyer, please feel free to contact us 0m 0330 221 8855 or email enquiries@attwaters.co.uk

It is important to take professional advice before making any decision relating to your personal finances. This blog is for information purposes only and can be subject to change without notice.