IHT Taper Relief Calculator

IHT Taper Relief Schedule 2026

Expert Guide: IHT Taper Relief and the 7-Year Rule

The Most Misunderstood Relief in IHT

IHT taper relief is routinely misunderstood — including by many people who have heard of the 7-year rule. The critical misconception is that taper relief reduces the value of the gift. It does not. Taper relief only reduces the IHT tax charge on the gift, and only when that charge arises in the first place. Since many gifts fall entirely within the £325,000 Nil Rate Band, there is no IHT charge and no taper relief is needed or relevant.

Potentially Exempt Transfers (PETs)

A Potentially Exempt Transfer is a gift from one individual to another (or to certain trusts for disabled persons). PETs are:

• Completely exempt from IHT if the donor survives 7 years from the date of the gift
• Brought back into the estate at full value if the donor dies within 3 years of the gift (no taper)
• Subject to taper relief if the donor dies between 3 and 7 years after the gift, but only to the extent the gift exceeds the NRB

Common PETs include cash gifts to children, transfers of investments, gifts of property (subject to reservation of benefit), and gifts to grandchildren. No IHT is paid at the time of the gift — it becomes potentially exempt, pending the 7-year survival period.

Chargeable Lifetime Transfers (CLTs)

A Chargeable Lifetime Transfer occurs when a gift is made to certain trusts — primarily discretionary trusts. CLTs differ from PETs in that:

• IHT may be due at the time of the gift at the lifetime rate of 20% (half the death rate) on amounts above the NRB
• If the donor dies within 7 years, additional IHT may become due (top-up to 40%), less any taper relief and any IHT already paid on the CLT
• CLTs count against the NRB in chronological order — a large CLT can erode the NRB available for later PETs or the death estate

The 7-Year Cumulation Rule — Critical for Planning

IHT does not assess each gift in isolation. All chargeable transfers (including CLTs) made in the 7 years before any given gift are cumulated and used to erode the NRB before it applies to the current transfer. This has significant practical implications:

• If you made a £325,000 gift 5 years ago and make another £200,000 gift today, the entire second gift is taxable (the NRB is already used)
• After 7 years, the first gift "falls out" of the cumulation period and the NRB refreshes for future gifts
• Careful sequencing and timing of gifts over multiple years maximises the NRB available at each stage

Taper Relief — When It Actually Matters

Taper relief is only relevant in two scenarios:

1. A large PET or CLT that exceeds the NRB, where the donor dies between 3 and 7 years after making the gift
2. Multiple gifts that together exceed the NRB, where taper on earlier gifts affects the overall IHT burden

For the majority of estates where total lifetime gifts are below £325,000, taper relief is academically interesting but practically irrelevant — no IHT arises on the gifts regardless of when the donor dies.

Who Pays the IHT on a Failed PET?

The primary liability for IHT on a failed PET (where the donor dies within 7 years) falls on the donee (recipient) of the gift. The executors of the estate are secondarily liable if the donee cannot pay. This is an important practical consideration — the recipient of a large lifetime gift may face an unexpected IHT bill years later. Gifting with awareness of this risk is important, and life insurance written in trust can protect the donee.

Gift with Reservation of Benefit

A gift with reservation of benefit (GROB) is where the donor makes a gift but continues to benefit from it — for example, giving their home to a child while continuing to live there rent-free, or gifting investments but retaining the income. GROBs are treated as remaining in the donor's estate — they do not start the 7-year clock and attract no taper relief. The "7-year rule" simply does not apply to GROBs until the reservation ceases.

Annual Exemption and Small Gift Exemptions

Several IHT exemptions allow gifts free of IHT regardless of survival periods:

• Annual exemption: £3,000 per tax year per donor; unused allowance can carry forward one year only (maximum £6,000)
• Small gifts: Any number of gifts up to £250 per recipient per year (cannot combine with annual exemption for same recipient)
• Wedding gifts: £5,000 from parent; £2,500 from grandparent; £1,000 from anyone else
• Normal expenditure out of income: Regular gifts made from surplus income (not capital) can be fully exempt — this is one of the most powerful and underused exemptions
• Maintenance of family members: Reasonable maintenance of spouses, children in full-time education, or dependant relatives

7-Year Life Insurance — Covering the Risk

A common and effective technique: when making a large PET, take out a reducing term life insurance policy for 7 years, written in trust. The cover decreases in line with the reducing IHT risk as taper relief increases over time. If the donor dies within 7 years, the payout covers the IHT on the failed PET — without adding to the estate. Premiums are typically modest for donors in good health.

Worked Example: £600,000 PET

Donor makes a cash PET of £600,000. Full NRB of £325,000 is available (no prior gifts). Donor dies 4.5 years later.

• Chargeable gift: £600,000 - £325,000 NRB = £275,000
• Gross IHT at 40%: £110,000
• Taper band: 4-5 years = 40% reduction
• Taper reduction: £44,000
• Net IHT payable by donee: £66,000

Note: If the donor had survived 7 years, £0 IHT would have been due. If they died within 3 years, £110,000 would have been due.