What is taper relief on Inheritance Tax gifts?

Taper relief reduces the Inheritance Tax payable on a failed Potentially Exempt Transfer (PET) - a lifetime gift to an individual where the donor dies within 7 years. The relief percentage rises with the number of complete years between the gift and death: 0% in the first 3 years, then 20% (3-4 yrs), 40% (4-5), 60% (5-6) and 80% (6-7). After 7 complete years the gift is fully exempt and drops out of the estate entirely. Taper relief is set out in section 7(4) of the Inheritance Tax Act 1984 and explained in HMRC manual IHTM14513.

Does taper relief reduce the gift value or just the tax?

It only reduces the TAX, not the gift value itself - and only on the portion of the gift that exceeds the available Nil-Rate Band. This is the single most common misconception. If your gift is fully within the £325,000 NRB, there is no tax to taper - the gift just consumes some NRB regardless of when you die. Taper only delivers value when the gift exceeds the NRB available at the date of death.

How does the Nil-Rate Band interact with the 7-year rule?

Lifetime gifts use up your £325,000 NRB in chronological order (earliest first), looking back 7 years from the date of death. Gifts within the 7-year window are added to the estate at their original value, NRB is applied to them first, and only the excess above NRB is taxed at 40% (then tapered by survival period). Any NRB used by failed PETs is unavailable to absorb the residuary estate, which is why a large gift made 6.5 years before death can still produce a tax bill - the NRB it consumed is gone from the death estate too.

What is the annual exemption and how does it apply?

Every individual has a £3,000 annual gifting allowance per tax year, exempt from IHT entirely - it never becomes a PET and never falls into the 7-year window. The annual exemption is applied first, BEFORE the gift value enters the 7-year regime. Unused exemption can be carried forward by one tax year, so a donor who used none in the previous year can gift £6,000 IHT-free in the current year. Larger gifts have £3,000 of their value automatically exempt, with the rest treated as a PET.

What counts as a Potentially Exempt Transfer (PET)?

A PET is a transfer of value from one individual to another individual, or into an absolute (bare) trust, or into a disabled person's trust. Outright cash gifts to children, helping with a house deposit, paying off a mortgage for a relative, gifting shares - all are PETs. Gifts into discretionary trusts are NOT PETs (they are Chargeable Lifetime Transfers, taxed at 20% upfront if above NRB), and they do not benefit from taper relief in the same way. Gifts to UK-resident spouses or civil partners and gifts to UK charities are immediately exempt and do not enter the 7-year window at all.

Who pays the IHT on a failed PET - the recipient or the estate?

The recipient of the gift is primarily liable for any IHT due on a failed PET. If they cannot or will not pay, the liability falls on the deceased's estate. This is one of the underappreciated risks of large lifetime gifts - if the recipient has spent the money by the time you die, your residuary estate (and therefore your other beneficiaries) ends up footing the bill. Term life insurance written in trust to cover the potential IHT liability for the 7-year period is a common mitigation - the premiums fall outside the estate when written in trust.

Are gifts with reservation of benefit covered by the 7-year rule?

No. A "gift with reservation of benefit" (GROB) - where the donor continues to benefit from the gifted asset, like giving away a house but still living in it rent-free - does NOT start the 7-year clock. The asset is treated as remaining in the estate for IHT purposes regardless of when the gift was made. To make a GROB into a true PET, the donor must pay full market rent for any continuing use, or stop benefiting entirely. The "pre-owned assets" tax regime (POAT) is the anti-avoidance backstop where the donor exits the GROB rules.

What records should I keep for lifetime gifts?

Executors need to know about every gift the deceased made in the 7 years before death to complete form IHT400 / IHT403 correctly. Keep a written record of: gift date, recipient name and address, asset description and value at the gift date, and any exemptions claimed (annual £3k, small gifts £250, normal expenditure out of income, wedding gifts). HMRC checks bank statements and Land Registry records for material undisclosed gifts. The "normal expenditure out of income" exemption is the most powerful for regular gifters but requires meticulous evidence that the gift came from surplus income, not capital.

£200,000 Lifetime Gift: UK IHT Taper Relief 2026/27

A £200,000 lifetime gift to an individual is a Potentially Exempt Transfer (PET). If the donor survives 7 complete years, the gift is fully outside the estate. Die earlier and the tax depends on how much Nil-Rate Band is available, plus how many years of taper relief have accrued. With the full £325,000 NRB available and 5 years of survival, the IHT bill is £0. With NRB fully consumed by earlier gifts and the donor dying within 3 years, it is £78,800. Verified against gov.uk taper table and HMRC IHTM14513.

NRB available, 5 yrs survived

£0

Chargeable £0 - 60% taper applied

No NRB, died within 3 yrs

£78,800

Full 40% rate - no taper relief

After 7 complete years

£0

Fully exempt - gift drops out of estate

Scenario A: full £325,000 NRB available

No earlier lifetime gifts in the 7-year window, so the gift can use the full Nil-Rate Band. The £3,000 annual exemption is also applied. This is the standard case for a first significant gift.

Years since gift	Chargeable	Tax before taper	Taper relief	Tax payable
0 to 3 years	£0	£0	£0	£0
3 to 4 years	£0	£0	£0	£0
4 to 5 years	£0	£0	£0	£0
5 to 6 years	£0	£0	£0	£0
6 to 7 years	£0	£0	£0	£0
7+ years	£0	£0	£0	£0

Scenario B: zero NRB available

Earlier lifetime gifts in the 7-year window already consumed the full £325,000 Nil-Rate Band. The entire £200,000 gift (less the £3,000 annual exemption) is in the chargeable slice. This is where taper relief matters most.

Years since gift	Chargeable	Tax before taper	Taper relief	Tax payable
0 to 3 years	£197,000	£78,800	£0	£78,800
3 to 4 years	£197,000	£78,800	£15,760	£63,040
4 to 5 years	£197,000	£78,800	£31,520	£47,280
5 to 6 years	£197,000	£78,800	£47,280	£31,520
6 to 7 years	£197,000	£78,800	£63,040	£15,760
7+ years	£0	£0	£0	£0

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Related calculators

IHT gift taper calculator - interactive form, tune NRB and annual exemption.
Inheritance Tax calculator - the full estate calculation including RNRB and £2m taper.
Capital Gains Tax calculator - some lifetime gifts also trigger CGT.
Pension drawdown - from April 2027 most pensions enter the IHT estate.

Frequently asked questions

What is taper relief on Inheritance Tax gifts?: Taper relief reduces the Inheritance Tax payable on a failed Potentially Exempt Transfer (PET) - a lifetime gift to an individual where the donor dies within 7 years. The relief percentage rises with the number of complete years between the gift and death: 0% in the first 3 years, then 20% (3-4 yrs), 40% (4-5), 60% (5-6) and 80% (6-7). After 7 complete years the gift is fully exempt and drops out of the estate entirely. Taper relief is set out in section 7(4) of the Inheritance Tax Act 1984 and explained in HMRC manual IHTM14513.
Does taper relief reduce the gift value or just the tax?: It only reduces the TAX, not the gift value itself - and only on the portion of the gift that exceeds the available Nil-Rate Band. This is the single most common misconception. If your gift is fully within the £325,000 NRB, there is no tax to taper - the gift just consumes some NRB regardless of when you die. Taper only delivers value when the gift exceeds the NRB available at the date of death.
How does the Nil-Rate Band interact with the 7-year rule?: Lifetime gifts use up your £325,000 NRB in chronological order (earliest first), looking back 7 years from the date of death. Gifts within the 7-year window are added to the estate at their original value, NRB is applied to them first, and only the excess above NRB is taxed at 40% (then tapered by survival period). Any NRB used by failed PETs is unavailable to absorb the residuary estate, which is why a large gift made 6.5 years before death can still produce a tax bill - the NRB it consumed is gone from the death estate too.
What is the annual exemption and how does it apply?: Every individual has a £3,000 annual gifting allowance per tax year, exempt from IHT entirely - it never becomes a PET and never falls into the 7-year window. The annual exemption is applied first, BEFORE the gift value enters the 7-year regime. Unused exemption can be carried forward by one tax year, so a donor who used none in the previous year can gift £6,000 IHT-free in the current year. Larger gifts have £3,000 of their value automatically exempt, with the rest treated as a PET.
What counts as a Potentially Exempt Transfer (PET)?: A PET is a transfer of value from one individual to another individual, or into an absolute (bare) trust, or into a disabled person's trust. Outright cash gifts to children, helping with a house deposit, paying off a mortgage for a relative, gifting shares - all are PETs. Gifts into discretionary trusts are NOT PETs (they are Chargeable Lifetime Transfers, taxed at 20% upfront if above NRB), and they do not benefit from taper relief in the same way. Gifts to UK-resident spouses or civil partners and gifts to UK charities are immediately exempt and do not enter the 7-year window at all.
Who pays the IHT on a failed PET - the recipient or the estate?: The recipient of the gift is primarily liable for any IHT due on a failed PET. If they cannot or will not pay, the liability falls on the deceased's estate. This is one of the underappreciated risks of large lifetime gifts - if the recipient has spent the money by the time you die, your residuary estate (and therefore your other beneficiaries) ends up footing the bill. Term life insurance written in trust to cover the potential IHT liability for the 7-year period is a common mitigation - the premiums fall outside the estate when written in trust.
Are gifts with reservation of benefit covered by the 7-year rule?: No. A "gift with reservation of benefit" (GROB) - where the donor continues to benefit from the gifted asset, like giving away a house but still living in it rent-free - does NOT start the 7-year clock. The asset is treated as remaining in the estate for IHT purposes regardless of when the gift was made. To make a GROB into a true PET, the donor must pay full market rent for any continuing use, or stop benefiting entirely. The "pre-owned assets" tax regime (POAT) is the anti-avoidance backstop where the donor exits the GROB rules.
What records should I keep for lifetime gifts?: Executors need to know about every gift the deceased made in the 7 years before death to complete form IHT400 / IHT403 correctly. Keep a written record of: gift date, recipient name and address, asset description and value at the gift date, and any exemptions claimed (annual £3k, small gifts £250, normal expenditure out of income, wedding gifts). HMRC checks bank statements and Land Registry records for material undisclosed gifts. The "normal expenditure out of income" exemption is the most powerful for regular gifters but requires meticulous evidence that the gift came from surplus income, not capital.