Tapered Relief IHT

How would you set the scene for this episode?

Tapered relief is one of the most misunderstood elements of Inheritance Tax planning. People who used to read the business pages on a Sunday afternoon were sometimes misled by the articles – and they’ve remembered these incorrect things for years.

Many people believe that tapered relief will apply to their estates if they make any gift and survive more than three years. But for most people, this just doesn’t happen. It only applies if the value of the gifts they make are over £325,000 within the seven-year period.

Most people will just be using up their Nil Rate Band with the gifts they make – and if they don’t survive seven years, the whole of the gift will be included in their estate, even if they survive four, five or even six years.

What is tapered relief? What is the NRB tapered relief?

Let’s start with the seven-year rule. When someone makes a large gift to someone else, it’s considered a Potentially Exempt Transfer.

If the person who made the gift lives for at least seven years after the gift was made, the gift is completely free from Inheritance Tax. Now, tapered relief is a mechanism that reduces the amount of Inheritance Tax payable on lifetime gifts if the donor dies between three and seven years after making the gift.

But remember, this only applies to the amount over and above £325,000. There’s no relief on the first £325,000 – it just uses up the Nil Rate Band (NRB).

How does tapered relief work with Inheritance Tax? How do you calculate tapered relief?

If you’ve made a qualifying gift and then live for more than three years – but less than seven years – the scale of reduction in tax on the amount above £325,000 is as follows:
0 to 3 years before death: No relief. The full 40% tax rate applies to the value of the gift that is above the Nil Rate Band.
3 to 4 years before death: The tax is reduced by 20%.
4 to 5 years before death: The tax is reduced by 40%.
5 to 6 years before death: The tax is reduced by 60%.
6 to 7 years before death: The tax is reduced by 80%.
7 years or more before death: The gift is completely exempt, and no IHT is due.

Is the seven-year IHT rule tapered?

The seven-year rule is a common term for how gifts are treated for Inheritance Tax purposes. So when someone makes a gift during their lifetime, it’s generally a Potentially Exempt Transfer (PET).

This means it’s exempt from Inheritance Tax provided the person lives for at least seven years after making the gift. If the person dies within seven years, the gift becomes a chargeable transfer and Inheritance Tax may be due on it. This is where tapered relief comes in.

The donor must survive three years before Inheritance Tax tapered becomes of any real benefit. But that’s only if the qualifying gifts are above the Nil Rate Band of £325,000.
Each gift is assessed in order of date. A gift made more than seven years before the date of death falls out of the calculations as time goes on.

What relief is available under Quick Succession Relief for IHT?

Quick Succession Relief is if someone receives an inheritance and then they die within five years of receiving that.
It’s a form of Inheritance Tax relief designed to prevent an asset from being taxed twice in a short period of time. It reduces the Inheritance Tax bill if someone’s estate includes assets inherited within the five years before their own death.

Can you be taxed twice on inheritance?

We’ve just discussed Quick Succession Relief, which tries to avoid that trap. I’ll also talk about assets located in a foreign country, which is increasingly common nowadays and can be another common situation for double taxation.

If a UK domiciled person who pays their taxes in this country has assets abroad, like a holiday home or a foreign bank account, those assets could be subject to Inheritance Tax in both the UK and the foreign country.

Some countries even have different rules in different states. The UK rule is that UK Inheritance Taxes are levied on the worldwide assets of a person domiciled in the UK. So all assets, regardless of location, are included in the Inheritance Tax calculation. But many countries have their own inheritance or succession tax laws. They will often tax assets within their borders, regardless of the deceased’s domicile.

Although you’re living and paying your taxes in the UK, you could find that you’ve still got to pay tax in Spain, for example, before then paying taxes in this country.

But there are rules to prevent this double jeopardy. The UK has double taxation treaties with several countries, including the US, France and Switzerland that specify which country has the primary right to tax certain assets.

This is a specialist area to look into when the time comes. In other countries, where the double taxation treaties don’t exist, the UK offers Unilateral Relief. This allows for a credit against the UK Inheritance Tax bill for any inheritance or death tax that’s been paid in the foreign country on the same assets. So you shouldn’t end up paying more than 40% under current rules.

What is Downsizing Relief on Inheritance Tax?

This relates to what’s called the Residence Nil Rate Band allowance (RNRB). This is an additional tax allowance that George Osborne brought in, used against the value of property left to direct descendants.

Typically, if you’re leaving the family home to your children or grandchildren, you can leave £325,000 (the Nil Rate Band) plus an additional £175,000 (RNRB) allowance. That leaves a total of £500,000 per person – which means a married couple can leave £1 million pounds directly to their children or grandchildren if they’ve owned property since a certain date.

Perhaps you have owned property from a certain date but then sell it to go into care. In this case there is something called a Downsizing Allowance or Downsizing Addition. It means that people who move to a smaller, less valuable home or sell to move into a care facility do not lose the benefit of this allowance.

How can Will Power help here? Have you got anything else to add?

Someone listening to this shouldn’t rely on it to see what all their options might be in estate planning. In the past, many Independent Financial Advisors dealt with investments, ISAs, life insurance and pensions, but estate planning using Wills and Trusts was completely ignored.
Now, when people discover what can be done, they might see this as the main area to start and then look at lifetime planning later.

Will Power can help by drafting Wills that can set up Trusts and save Inheritance Tax on a generational basis. Primarily, though, they’re used to protect assets for the bloodline.
I also get involved with dealing with estates after people have died. Just this year, we’ve saved two separate clients £150,000 to £200,000 in Inheritance Tax, just through our knowledge and experience.

In one case, a client went to a local solicitor who wasn’t that familiar with the rules when a Trust is created in your Will. They suggested that our client should pay a lot more tax than actually was necessary.

We’ve been doing this a long time, and we’re here to make sure you don’t miss out on the Inheritance Tax savings that can be gained.

[All information in this episode is correct at the time of recording in August 2025].