Taper relief explained

When it comes to thinking about what you want to pass on, it’s natural to focus on who gets what. But with inheritance tax, when you give something can be just as important as what you give. And that’s where taper relief comes in.

In the UK, taper relief usually refers to a reduction in the Inheritance Tax (IHT) charged on certain gifts made during someone’s lifetime if they die within seven years of making them. It applies on a sliding scale, so the longer the person survives after making the gift, the lower the tax rate on that gift can be.

Understanding a few key rules now can help shape how much of your money reaches the people you care about. Here’s a clear guide to the basics and what these rules mean for you.

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Let’s begin with inheritance tax

Inheritance tax (IHT) is a tax on your estate when you die. Your estate includes everything you own, such as property, savings, investments and belongings. Currently, pensions aren’t included in your estate, but from 6 April 2027, most unused pension funds and death benefits will be included in a person's estate.

Inheritance tax (IHT) generally applies if the total value of your estate exceeds £325,000 (known as the nil-rate band). As we’ll cover later, this allowance can be reduced by some lifetime gifts.

Any wealth passed on above the available nil-rate band is likely to be taxed.

The amount you can pass on IHT-free can increase to up to £500,000 if you leave your main home to direct descendants such as children, stepchildren, adopted or foster children, or grandchildren, subject to certain conditions. This additional allowance is gradually reduced for estates worth more than £2 million and may be lost entirely for very high-value estates.

Spouses and civil partners can combine allowances, which means many couples can pass on up to £1 million free of IHT once both have died. Anything over and above these values is subject to the standard rate, which is 40%.

Read more on how inheritance tax works here

What is the seven-year rule?

One of the clearest examples of timing affecting IHT is the seven-year rule. If you give someone a gift during your lifetime, it may be treated as a potentially exempt transfer, often shortened to a PET. A PET becomes free of IHT if you live for seven years after giving it.

If you pass away within seven years, the gift may still be subject to IHT, but a sliding scale known as taper relief could reduce the amount owed.

There are also gifts that are exempt straight away and don’t rely on the seven-year rule at all. These include the annual £3,000 exemption, small gifts of up to £250 per person (so long as you haven’t used any other gifting allowances on that person), certain wedding gifts and regular gifts from surplus income. These gifts don’t reduce your nil-rate band and don’t depend on how much time passes after you give them.

Read more on gifting here.

What is taper relief?

Taper relief is a rule that can reduce the amount of inheritance tax payable on gifts made as part of the seven-year rule. It only applies if the person dies between three and seven years after making the gift. If they were to pass away within three years of gifting, inheritance tax (if it’s due) usually must be paid in full on that gift (40% rate).

Taper relief only applies if the total value of all gifts made in the seven years before death is more than the £325,000 nil-rate band. Many people never reach that point, so taper relief doesn’t always come into play.

But when it does, the taper relief rule uses a sliding scale to calculate how much IHT is owed depending on what year the person gifting passes away.

How does the taper scale work?

The taper scale is designed to reflect the passage of time. After the third year, the tax rate falls each year. The reduction is 8 percentage points for each full year that passes until the seven-year mark, when no IHT is due on the gift.

For example:

• If you live 3-4 years after making the gift, the IHT rate drops from 40% to 32%
• If you live 4-5 years after making the gift, the IHT rate drops from 32% to 24%
• And so on

When you die, failed gifts are the first thing to use up your nil-rate band.

The order in which gifts are made also matters. HMRC applies gifts chronologically. Earlier gifts use up the nil-rate band first, which can affect how later gifts are taxed if you die within seven years.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.