ATXP6 UK
Syllabus A3. Inheritance Tax A3d. IHT liabilities on lifetime transfers during life and death

A3dii. Taper Relief

Syllabus A3dii)

D1 The basic principles of computing transfers of value
and
Advise on the tax implications of transfers within seven years of death

What is taper relief?

This is:

It would be somewhat unfair if a donor did not quite live for seven years after making a gift with the result that the gift was fully chargeable to IHT. 

Therefore, taper relief reduces the amount of tax payable where a donor lives for more than three years, but less than seven years, after making a gift. The reduction is as follows:

Years before death Percentage reduction %
Over three years but less than four years 20
Over four years but less than five years 40
Over five years but less than six years 60
Over six years but less than seven years 80

Although taper relief reduces the amount of tax payable, it does not reduce the value of a gift for cumulation purposes.

The taper relief table will be given in the tax rates and allowances section of the exam.

Illustration:

Winnie died on 9 January 2019. She had made the following lifetime gifts:

  • 2 February 2012 – A gift of £473,000 to a trust. The trust paid the IHT arising from this gift.

  • 16 August 2015 – A gift of £320,000 to her son.

These figures are after deducting available exemptions.

The nil rate band for the tax year 2011/12 is £325,000, and for the tax year 2015/16 it is £325,000

IHT liabilities are as follows:

Lifetime transfers £
2 February 2012
Chargeable transfer 473,000
IHT liability
325,000 at nil% 0
148,000 at 20% 29,600
29,600
16 August 2015
Potentially exempt transfer 320,000

Additional liabilities arising on death

2 February 2012
Chargeable transfer 473,000
IHT liability
325,000 at nil% 0
148,000 at 40% 59,200
Taper relief reduction – 80% (47,360)
11,840
IHT already paid (29,600)
Additional liability 0

The taper relief reduction is 80% because the gift to the trust was made between six and seven years of the date of Winnie’s death.

Although the final IHT liability of £11,840 is lower than the amount of IHT already paid of £29,600, a refund is never made for life tax paid, it can only reduce the IHT liability to zero.

16 August 2015

£
Potentially exempt transfer 320,000
IHT liability 320,000 at 40% 128,000
Taper relief reduction – 20% (25,600)
102,400

The taper relief reduction is 20% because the gift to the son was made between three and four years of the date of Winnie’s death.