Taper relief reduces the tax on lifetime gifts if the donor survives at least 3 years.
It works on a sliding scale from years three to seven, which means that by the seventh year there is usually no inheritance tax to pay – but the relief only applies to the value of gifts over the Inheritance Tax nil rate band
In the context of a Potentially Exempt Transfer, the taper means that if the donor survives for at least three years, only a reduced percentage of the full death rates will be used as follows:
Years between gift and deathPercentage of full charge at death rates 0-3100% 3-480% 4-560% 5-640%
Although the taper relief reduces the amount of tax payable, it does not reduce the value of the transfer for the purposes of the donor’s cumulation. The full value of the transfer is included in the donor’s cumulation for the purposes of working out the death tax on the estate.
The current nil-rate band is £325,000. IHT is charged at a rate of 40% on the chargeable value of an estate (above the nil-rate band) after taking into account the value of any chargeable lifetime transfers.
It’s important to remember that taper relief does not reduce the value of the gift transferred, it only reduces the tax payable.