Reply With QuoteMy understanding is you pay no IHT on gifts after 7years. If the person making the gift passes within 7 years IHT is due in 1/7ths per year since the gift was made.
I am trying to help someone with an inheritance tax query and it has thrown up a question about 'taper relief'.
Basically the gentleman left about £400K + £200K from his share of a property, so IHT kicks in. He also gifted money in the 7 years prior to his death, including £150K in 2016 and a further £21K in 2018. Their probate specialist has suggested they need to pay IHT at 40% on the whole amount over the £500K threshold.
I thought the gifts in 2016 should be taxed at 24% and the 2018 gifts at 32% or am I wrong.
My understanding is you pay no IHT on gifts after 7years. If the person making the gift passes within 7 years IHT is due in 1/7ths per year since the gift was made.
Probably best to speak to an expert, but I agree with your thoughts, 40% on the £100k over the £500k, then taper on the gifts as follows
0-3 yes 40%
3-4 yrs 32%
4-5 yrs 24%
5-6 yrs 16%
6-7 yrs 8%
Note it's the person that received the gifts that has to pay the tax on those, which could be a different person(s) to who is inheriting.
Wasn't married was he? I assume you're aware unused nil rate band from a previously deceased spouse carries over, making it £1mill
Thanks for this. His wife is still alive, but end stage dementia.Originally Posted by Brighty
Ok, is he leaving everything to the wife? If so it's all excempt and she will have a £1mill nill rate when she passes
He says children inherit and I don't think it goes to his wife first and vice versa.
Last edited by K-Z1R; 2nd April 2022 at 19:41.
Think this just confirms what has been said:
https://www.gov.uk/inheritance-tax/gifts
The 7 year rule
No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7 year rule.
If you die within 7 years of giving a gift and there’s Inheritance Tax to pay, the amount of tax due depends on when you gave it.
Gifts given in the 3 years before your death are taxed at 40%.
Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.
Taper relief
Years between gift and death Rate of tax on the gift 3 to 4 years 32% 4 to 5 years 24% 5 to 6 years 16% 6 to 7 years 8% 7 or more 0%
Thanks everyone. It seems the specialist has missed this and glad that my minimal research flagged this up.
I may have got this wrong and I claim no specialist knowledge but to answer this do you not have to know exactly how much the deceased gifted and when as would failed PETs not be first set against the deceased's nil rate band?
Only when you know that can you establish whether tapering relief applies and depending on the answer the specialist may be correct
(waits to be shot down in flames)
Potentially exempt transfers (that is, personal, non- exempt and generally non-trust gifts) within seven years of death are treated as using up the nil rate band on death. What that means is that the taper only kicks in once the “failed” PETs that are added back to the death estate exceed the NRB.
That could be a costly mistake if he owns everything and the wife nothing. It was a popular tactic before transfer of nil rate bands between spouses was allowed, leave your half to the kids, no IHT, then wife leaves her half, now with the transfer, it's easier for the first to leave everything to the remaining one, then they get double allowance to leave to the kids. If he owns everything, then IHT is due on everything over 500k, the wife then loses out on her nil band if she's got nothing to leave
Before the transferable NRB was introduced we used to use quite convoluted debt or charge schemes to ensure both spouses’ NRBs were used because for most couples the family home is the main asset.
As you say the transferable NRB regime obviates that.
In this case it looks as if the gentleman’s wife lacks testamentary capacity and, reading between the lines, may have the shorter life expectancy. A professional review of the couple’s circumstances would be a good idea.
Just to add, there are one or two IHT planning tactics available to those looking after the affairs of people with short life expectancy and or lacking testamentary capacity but they are definitely specialist planning outside the scope of most high street solicitors.
This is not a tout for business by the way - I’m in the process of retiring!
Thanks for your replies, although I remain a touch confused. In the circumstances I have given, should taper relief apply to the earlier gifts or is the 40% tax on everything over the £500K allowed correct? If it is 40%, I don't understand why the 'taper relief' exists.
I read this.... If you don’t live for seven
years after making the gift, the portion
exceeding the £325,000 threshold will be
taxed. The tax due is calculated on a sliding
scale based on the time between the gift and
death. This is known as taper relief.
The wife is financially secure, so doesn't lose anything.
Last edited by K-Z1R; 3rd April 2022 at 07:11.
On re-reading - it wasn’t clear at first whether the gentleman was still alive as it looked like you referred to him in one post in the present tense.
As to the rate of tax on these lifetime gifts. Actually they are taxed at 0% because they use up the first part of the nil rate band. No taper will apply to them.
However the NRB applicable to the death estate is now reduced as a consequence, so less of the death estate will benefit from the 0% tax rate, and more of it will suffer the 40% rate.
It helps if you remember that there are actually two IHT rates on death- 0% and 40%. The 0% rate is definitely an applicable tax rate (albeit a favourable one!) and not a relief or exemption, which have other meanings in IHT.
Why do the gifts use up the first part of the nil rate band? Isn’t the the whole point of making gifts to preserve the nil rate band?
I did mention in the first post about his death and what he had left after death and what was gifted prior to it. I will probably have to wait and see what advice is given to my friend as it remains unclear what impact the so called 'taper relief' has on his estate, if any. Why does it even get mentioned if after he dies his estate gets a tax rate of 0% or 40%? Confused...you bet we are.
Perhaps it needs explaining in more 'Layman' terms.
OK I will try - as I understand it
The nil rate band is just that.
The first 325k is taxed at 0%
Failed PETs above that are nominally charged at 40% hence the 2 rates of tax referred to.
However a "discount " on the 40% tax may be available depending when the failed PETs were made... the discount being "taper relief"
You can't "discount" from 0% hence the taper relief doesn't apply to the nil-rate band
As to the point of making large lifetime transfers from capital , they should be done early enough for there to be a likelihood that , if the donor gives up fags and looks both ways before crossing the road, they will become fully exempt
Last edited by stiglet; 3rd April 2022 at 09:30.
deleted
Last edited by JonRA; 3rd April 2022 at 09:40.
Thanks, so because the early gifts get counted first towards the 0% rate irrespective of when they were given, they are ignored for 'Taper relief' and just count towards the overall pot of money remaining?
What is a failed PET? A gift that was made but the person made the gift didn’t survive the 7 years?
If that is the case doesn’t the gift just get taxed as the appropriate tapered rate and not deduct from the zero rate band?
Any PET made in the previous 7 years is added to the Estate and forms the first part.
Taper relief reduces the tax that is payable so anything below the NRB will no benefit, as it is 0%.
Tapering relief is a bit of a red herring as only those who benefit are those who can gift large sums of money ie in excess of the NRB.
Last edited by nick67; 3rd April 2022 at 10:19.
Thanks and much clearer now.
So In the OPs example the estate is
400 + 200 + 150 + 21 = 771.
IHT if the grifs where over 7 years ago would be £40k
If no gifts had ever been made IHT would be £108.4K
In the example given some taper relief will reduce the bill to £40k + (150x24%) + (21x32%) = £82.72k
Is that correct?
My understanding now is that the 150 + 21 are counted against the allowed 0% rated £325K. The remaining 600 (400+200) use up the remaining part of the 325 + 175 for the property and the leftover amount gets hit for 40%. Taper relief doesn't come into play as the amount of gifts (171) are less than the allowed 325. If the gifts had totalled say 400 then Taper relief would apply.
Ah …. Really. That’s news to me. Is this a change to the taper relief?
So any gifting of less than 325k is pointless unless the gifter survives 7 years?
Last edited by Montello; 3rd April 2022 at 15:04.
That is what I understand from the answers received. I have passed that info on and will await what the dealing solicitor says tomorrow.
Seems taper relief doesn't start until more than 325 is used in previous 7 years.
Last edited by K-Z1R; 3rd April 2022 at 14:53.
Seems an odd protocol that the taper relief does not apply to smaller gifts. Bit all or nothing in that scenario.
They are taxing them at 0% if under the 325 and any gifts totalling more than 325 over years 3-7 prior to death would then get the relevant taper applied.
It is still the same as raping the dead though!
It seems the taper relief is only applicable once gifts have used up all the nil rate band - not the most intuitive!
https://www.gov.uk/inheritance-tax/gifts
Well this topic has been an education. I thought taper relief applied to all gifts.
So any smaller gifts need to be survived by 7 years to have any tax advantage.
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