UK Inheritance Tax Taper Relief Guide (7-Year Rule Explained)

What Is Taper Relief

Taper Relief is not a discount on the value of the gift. It is a reduction in the rate of Inheritance Tax payable on gifts made more than three years before death. The relief only applies to gifts that exceed the available nil rate band at the time of death. If the total value of gifts made in the 7 years before death is less than the nil rate band (£325,000), no IHT is due regardless of when the gifts were made — taper relief is irrelevant in that scenario.

The key point to understand: taper relief reduces the tax rate on the gift, not the value of the gift. If you give away £500,000 and die 5 years later, it is not that the £500,000 is reduced — rather, the tax rate on the excess above the nil rate band is reduced from 40% to 24%. This distinction is commonly misunderstood and leads to planning errors.

Taper relief only applies to gifts made to individuals (Potentially Exempt Transfers) and to certain types of trust. It does not apply to gifts into a discretionary trust, which are immediately chargeable lifetime transfers. And crucially, gifts within 3 years of death are taxed at the full 40% rate with no taper relief whatsoever.

How the 7-Year Rule Works

The taper relief percentages are as follows: gifts made 3 to 4 years before death are taxed at 32% (80% of the 40% rate); 4 to 5 years: 24% (60%); 5 to 6 years: 16% (40%); 6 to 7 years: 8% (20%); over 7 years: 0%. Gifts within 3 years of death are taxed at the full 40% rate.

Example: Sarah gives her son £400,000 and dies 4.5 years later. The first £325,000 of the gift uses her nil rate band and is tax-free. The remaining £75,000 is taxed at 24% (the 4-5 year taper rate), giving an IHT bill of £18,000. Without taper relief, the bill would have been £30,000. If she had died within 3 years, the bill would be £30,000. If she had survived 7 years, it would be zero.

Note that the 7-year clock runs from the date of the gift, not from the date of death. For gifts made on different dates, each gift has its own 7-year period. The oldest gift falls out of the estate first. Multiple gifts are aggregated, with the earliest gifts treated as using up the nil rate band first.

Potentially Exempt Transfers

A Potentially Exempt Transfer (PET) is a gift made to an individual. It is "potentially" exempt because it becomes fully exempt from IHT if the donor survives for 7 years after making the gift. If the donor dies within 7 years, the PET becomes a chargeable transfer and is added back into the estate for IHT purposes, subject to the nil rate band and taper relief.

Gifts with reservation of benefit are treated differently. If you give away an asset but continue to use it or benefit from it (for example, giving away your house but still living in it), the gift is ineffective for IHT purposes. The asset remains in your estate as a "gift with reservation." HMRC can also apply the "pre-owned assets tax" rules, which charge income tax on benefits you retain from gifts you have made.

Calculating cumulative gifts over the 7-year window is complex. HMRC looks at all gifts made in the 7 years before death, starting with the earliest gift and working forward. Each gift uses up the nil rate band in chronological order. Only when cumulative gifts exceed the nil rate band does taper relief become relevant, and the taper rate depends on when each individual gift was made.

Interaction with Nil Rate Band

The nil rate band is applied to gifts in the order they were made, starting with the earliest gift within the 7-year window. This is important because it means earlier gifts are more likely to be covered by the nil rate band, while later gifts (which have less taper relief available) are more likely to be taxed. Each gift above the nil rate band is then taxed at the taper rate applicable to that gift based on when it was made.

If the deceased made gifts in more than one tax year, the cumulative total of all gifts in the 7-year period is calculated. The nil rate band is then applied against the total. The order of chargeability is: first against gifts made 3-4 years before death, then 4-5, then 5-6, then 6-7. Gifts within 3 years are taxed first at the full 40% rate before taper relief applies to earlier gifts.

Record Keeping Requirements

HMRC requires detailed records of all lifetime gifts. The estate executor must report gifts made in the 7 years before death on the IHT400 form. For each gift, HMRC requires: the date of the gift, the value at the time of the gift, the name and address of the recipient, and details of what was given. For shares or property, a formal valuation may be needed.

Regular gifts from surplus income — which are exempt from IHT — require careful record keeping. You must show that the gifts were made out of normal expenditure, were part of a regular pattern, and did not reduce your standard of living. Bank statements, a written record of the gifting pattern, and evidence of income and expenditure are essential. Estates must report and pay any IHT due within 12 months of death, or interest charges apply.

Practical Examples

Example 1: David gifts £400,000 to his daughter 4.5 years before his death. Nil rate band £325,000. Excess: £75,000. Taper rate for 4-5 years: 24%. IHT due: £75,000 × 24% = £18,000.

Example 2: Multiple gifts over 6 years. Gift 1: £200,000 (6 years before death). Gift 2: £150,000 (4 years before death). Gift 3: £100,000 (2 years before death). Nil rate band £325,000 applied to gifts in order: Gift 1 uses £200k of NRB (£125k remaining). Gift 2 uses £125k of NRB (exhausted). Gift 2 remaining £25k taxed at 24% = £6,000. Gift 3 full £100k taxed at 40% = £40,000. Total IHT: £46,000.

Example 3: A £3 million estate with a gifting programme. Lifetime planning can significantly reduce IHT exposure. Making regular gifts from income (exempt), using annual exemptions, and making PETs with the intention of surviving 7 years can remove substantial value from the estate. For high-net-worth individuals, combining gifting with trusts, business relief, and agricultural relief can reduce the IHT bill to near zero. Professional advice is strongly recommended for complex estates.

Planning to Minimise Taper Relief Impact

There are several practical steps you can take to minimise the impact of taper relief on your estate. First, keep detailed records of all gifts: date, value, recipient, and the asset given. This documentation is crucial for your executors, who must report gifts on the IHT400 form. Second, consider taking out a term life insurance policy written in trust that covers the potential IHT liability on gifts made within 7 years. The policy pays out on death within the 7-year period, providing your beneficiaries with funds to pay any IHT due without having to sell assets.

Third, if you are planning to make significant gifts, start early. The 7-year clock only begins from the date of the gift, so the earlier you give, the more likely it is that you will survive 7 years and the gift will be fully exempt. Fourth, use your annual exemptions (£3,000 per year) and normal expenditure out of income exemptions first, before making larger PETs. These exempt gifts do not count towards the nil rate band or the 7-year aggregation. Finally, for married couples and civil partners, consider splitting gifts between both partners to make full use of both nil rate bands. Each partner can give £325,000 tax-free (plus annual exemptions), effectively doubling the tax-free gifting capacity of a couple. For larger estates, setting up a discounted gift trust or a loan trust can provide a more structured approach to gifting while retaining some access to capital.

Common Mistakes and How to Avoid Them

A common misunderstanding is thinking that taper relief reduces the value of the gift. It does not. If you give away £500,000 and die 5 years later, the gift is still valued at £500,000 on the IHT return — it is the tax rate on the excess above the nil rate band that is reduced from 40% to 24%. Another mistake is assuming that the nil rate band is applied to the most recent gifts first. In fact, HMRC applies the nil rate band to the earliest gift in the 7-year window and works forward, which can disadvantage later gifts that may have less taper relief available. A third common error is failing to keep records of gifts. Without documentary evidence, your executors may struggle to prove the value and timing of gifts, potentially leading to HMRC challenges and additional tax liabilities. Many people also forget that gifts to trusts are immediately chargeable lifetime transfers — not PETs — and may trigger an immediate IHT charge at 20% if they exceed the nil rate band. Getting professional advice before making substantial gifts is always wise.

FAQs

Does taper relief apply to all gifts?

No. Taper relief only applies to gifts where the donor survives at least 3 years after making the gift. It only applies to the portion of gifts that exceed the nil rate band.

What is the maximum taper relief?

The maximum taper relief is at 6-7 years, where the tax rate is reduced to 8% (20% of the full 40% rate). After 7 years, no IHT is due at all.

How do multiple gifts affect taper relief?

Gifts are aggregated and the nil rate band is applied to the earliest gifts first. Each gift is then taxed at the taper rate applicable to its own timing relative to death.

Do I need to report gifts during my lifetime?

There is no requirement to report PETs during your lifetime. However, your executors must report all gifts made in the 7 years before death on the IHT400 form.

Can I use taper relief to avoid IHT completely?

Taper relief only reduces the IHT rate — it does not eliminate the tax unless the gift value is within the nil rate band. To avoid IHT completely, you need to survive 7 years after making each gift.