Useless gift tapering

Dibblez

I had always assumed that you could use up your tax free threshold on assets that were to be taxed at the maximum 40%, but I've now come across this example on gov.uk that suggests you have to use it on the lowest taxed items first:

Example: Sally died on 1 July 2018. She was not married or in a civil partnership when she died.

Sally left 3 gifts in the 7 years before her death:

£300,000 to her brother 6.5 years before her death (8% tax)
£50,000 to her sister 4.5 years before her death (24% tax)
£150,000 to her friend 3.5 years before her death (32% tax)

Sally is not entitled to any other gift exemptions or reliefs.

There’s a £325,000 inheritance tax threshold. Anything below this amount is tax free.

£300,000 is used up by the gift Sally gave her brother. There’s no tax to pay on his gift.

The remaining £25,000 is used up by her £50,000 gift to her sister. There’s tax to pay on the amount not covered by the threshold. That means there’s tax to pay on £25,000 of the gift to Sally’s sister at a rate of 24%.

The £150,000 gift given to her friend is taxed at a rate of 32%.

Sally’s remaining estate was valued at £500,000 and charged at the usual 40% inheritance tax rate. Sally used up the tax-free threshold on gifts given before her death.

Is this correct? If so, doesn't it mean that tapering is practically useless for most people as the £300,000 from 6.5 years might just have well been taxed at 40% instead of 8%?

getmore4less

Taper relief only applies to the excess over the nil rate band gets used up oldest first.

Don't forget it includes any transferable nil rate band on second deaths.

MumOf2

Yes, that's right. Gifts are considered first so, say, someone gifts £300,000 over the past 7 years then this takes up the first £300K of the £325K allowance. This leaves £25K allowance for the rest of the estate. Anything over £25K (assuming that is the only allowance available) is taxed at 40%. The tapering is only available if the gifts exceed the available allowance, e.g. gifts £400K which include £75K of gifts in years 4-7 prior to death.

Tapering is really complex which is, I suppose, why IHT403/IHT400/IHT400 Calculation says to leave it to HMRC to work out.

Best way is to claim exemption under IHTA 1984 section 21 if that's possible.

Also there are additional allowances for a predeceased spouse (up to £325K), primary residence left directly to chdn/step chdn, etc. and transferable primary residence for a predeceased spouse (combined £300K for 2019/20).

Hope this helps.

MumOf2
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relaxtwotribes

But also note that the residence nil rate band REDUCES by £1 for every £2 of estate above £2m. So that when the estate reaches £2.30m (£2.35m for 2020/21 and after) there is none left.

MumOf2

Yes, that's right Relax. There are special provisions for estates over £2 million which reduces the amount of residence nil rate band.

MumOf2

Dibblez

Thanks everyone. It's a shame that most guides don't point out this rather important limitation. It seems that tapering is only of use to the super-rich, who can gift more than the tax-free threshold.