Generally most gifts that do not fall into the allowances, reliefs and exemptions categories are considered Potentially Exempt Transfers commonly referred to as PETs. The IHT rate applicable to these gifts depends upon the number of years that have passed between the date the gift was given and the giver’s death.
The rate of tax to be paid has a sliding scale of relief applied to it over seven years which effectively reduces the rate to zero. This is called Taper Relief which is applied as follows: Years between gift and death | Reduction in Tax Applicable | | 0-3 | 0% | | 3-4 | 20% | | 4-5 | 40% | | 5-6 | 60% | | 6-7 | 80% | | 7 | 100% |
Note: Taper relief only reduces the tax payable where the total of gifts in the previous seven years is greater than the applicable Nil Rate Band.
Here is a worked example of how the application of Taper Relief can reduce the amount of IHT to be paid:
A widower, Mr. Smith, gave his son £425,000 as a gift 5 years and 6 months before he died. The value of Mr. Smiths’ estate when he died was £500,000 made up of £200,000 for his house and £300,000 in other assets.
Because Mr. Smith died less than 7 years after he gave the £425,000 to his son, the gift is still regarded as part of his Estate for IHT purposes. So the total value of his estate is regarded as £925,000.
Mr. Smith did not receive any transferrable Nil Rate Band (NRB) from his spouse so the NRB applicable to his estate is £325,000. When the £325,000 NRB is applied to the value of the gift, £100,000 remains liable for Inheritance Tax, which qualifies for Taper Relief as follows:
Item | Amount | |
Gift to son
| £425,000 | | Nil Rate Band (2009/10 rate) | - £325,000 | | Therefore total of gift liable for IHT | £100,000 | |
Tax Rate for IHT (2007/08)
|
x 40%
| | Therefore tax payable without Taper Relief would be | £40,000 | |
Taper Relief rate after 5½ years(see table above)*
|
x 60%
| | Therefore amount of Taper Relief | £24,000 | |
Tax payable before Taper Relief applied
| £40,000 | | Taper Relief | - £24,000 | | Tax payable after Taper Relief applied | £16,000 | |
* The gift was made 5½ years before death, therefore the discount is 60% of the tax due
| In this case the remainder of Mr. Smiths Estate (£500,000) will be liable for IHT at the standard rate of 40%. There are also different classes of gifts which may affect you, particularly Chargeable Lifetime Transfers (CLTs) and Gifts With Reservation (GWRs) as well as additional tax reliefs available for the transfer of businesses. Please contact us for further information about these items and how they may be able to benefit you.
Whatever your particular situation, you should always take professional financial advice when considering any options relating to IHT.
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