With ongoing changes to Inheritance Tax, many individuals, particularly married couples or those handling an estate after the second parent's passing are increasingly concerned about how best to structure their estate to minimise tax liabilities. In this article, Emma Needham, Partner and Head of Wills and Trusts in our Private Client Services team, explains the concept of these allowances and their role in estate planning.
What is Inheritance Tax (IHT) Allowance?
The Inheritance Tax (IHT) Allowance, commonly referred to as the Nil Rate Band (NRB), is the threshold up to which an individual's estate is not subject to IHT. As of 2024, the NRB is set at £325,000. This means that if the total value of an estate falls within this threshold, no IHT is payable.
For married couples and civil partners, any unused portion of the NRB can be transferred to the surviving spouse, effectively doubling the threshold to £650,000 before IHT becomes due. The Residence Nil Rate Band (RNRB) offers further relief when passing a primary residence to direct descendants, potentially increasing the total tax-free allowance.
Many individuals do not realise that the NRB is applied to lifetime gifts first. This means that even if an estate is valued below the NRB, IHT may still be due depending on past gifting activity. In such cases, Taper Relief may apply to reduce the overall tax liability. But how does Taper Relief work, and who can benefit from it?
What is Taper Relief and Where Does It Apply?
Taper Relief is a tax reduction applied to lifetime gifts made between three and seven years before the donor's death. While this may seem straightforward to reduce IHT liabilities, its application depends on specific conditions.
Taper Relief only applies if the lifetime gifts (not the estate) are taxable. Since the NRB is applied to lifetime gifts first, if all gifts fall within this threshold, there is no tax payable, meaning Taper Relief would not apply to reduce tax liabilities.
When Do Gifts Qualify for Taper Relief?
For Taper Relief to be relevant, the total value of gifts made within seven years before death must exceed the available NRB. For individuals with a transferrable NRB, such as surviving spouses or civil partners, this threshold could be even higher, further reducing the likelihood of Taper Relief applying.
How Is Taper Relief Calculated?
The NRB is applied to gifts made in chronological order (oldest first). Once the allowance is exhausted, any additional gifts become taxable. If taxable gifts fall within the stated timeframe, Taper Relief is applied on a sliding scale depending on when the gift was made.
Key Consideration: Taper Relief applies to the tax payable, not the value of the gift itself. For example, if a taxable gift made between four and seven years before death exceeds the NRB, the IHT charge would be reduced to 24% instead of the standard rate of 40%.
Why Might an Estate Not Qualify for Taper Relief?
Even if an individual made substantial lifetime gifts, their estate may not qualify for Taper Relief if all taxable gifts fall within the NRB. Since IHT is calculated chronologically, gifts from earlier years consumer the NRB first, leaving later gifts subject to full taxation with no available relief.
Who Pays Inheritance Tax on Lifetime Gifts?
When IHT applies to lifetime gifts, the gift recipient - not the estate - is responsible for paying the tax, regardless of whether Taper Relief applies. Beneficiaries should be aware of potential tax liabilities on gifts received before the donor's passing, as these could impact their financial situation. However, this may change if the deceased's Will states otherwise.
Case Study: How Taper Relief Works in Practice
Scenario:
J passed away in January 2023, leaving an estate valued at £1 million. Over the preceding seven years prior, J made lifetime gifts to their children, resulting in chargeable gifts exceeding the NRB. Here is how IHT and Taper Relief applied.
Total tax saving for the gift recipient from Taper Relief: £25,840.
This example demonstrates how Taper Relief can significantly reduce IHT liabilities, even in cases where taxable gifts exceed the NRB.
How We Can Help
Careful estate planning ensures you fully utilise IHT allowances and exemptions, reducing potential tax burdens for beneficiaries. If you require assistance with estate planning, please contact Emma Needham on 01258 488208; or email emma.needham@blanchardsbailey.co.uk
You can also visit our Wills, Probate and Estate Planning webpage for details.
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