Taper relief IHT

[Deleted User]

Jeremy535897 said:

Ignore RNRB and spouses. Suppose you have a £1 million estate. Inheritance tax on death is £1 million - £325,000 = £675,000 at 40% = £270,000.

Now say you give £325,000 (ignoring the annual exemption etc) to your son 6 years and a day before you die. The gift is a failed PET because you didn't survive 7 years. The gift used all the nil rate band, so the tax on death is £675,000 (the value of the estate) at 40% = £270,000.

Now say you give £500,000 (ignoring the annual exemption etc) 6 years and a day before your death. This is still a failed PET, but the tax now due is £500,000 (the remaining estate) at 40% = £200,000, plus (£500,000-£325,000) at 8% = £14,000, total £214,000. Taper relief on the excess of £175,000 over the nil rate band applies.

An excellent explanation!

castle96

Why ignore the RNRB Not married/widower. Sorry, still confused. I had always thought. £325 + £175 (HOUSE TO SON), LESS ANY LIABILITY UNDER TAPER RELIEF. I've given £100K IN THE 7 YRS PRIOR TO DEATH....so I thought tax would be due on any estate over £500 (325+175) + the liability on the £100K BASED ON THE TAPER RELIEF CALC. Sorry but still not clear on this. Forget any other exemptions. Is my calc above correct?

Jeremy535897

I ignored RNRB to make it simpler to see the point I was making. You are incorrect. If you give away £100,000 in the 7 years prior to death, there is no taper relief, because no tax arises on the gifts. It's just that there is £100,000 less nil rate band available on death.

As you are a widower, though, if your wife did not use her nil rate bands, they may be added to yours, which may well mean that you will not have an inheritance tax liability anyway.

Keep_pedalling

castle96 said:

Why ignore the RNRB Not married/widower. Sorry, still confused. I had always thought. £325 + £175 (HOUSE TO SON), LESS ANY LIABILITY UNDER TAPER RELIEF. I've given £100K IN THE 7 YRS PRIOR TO DEATH....so I thought tax would be due on any estate over £500 (325+175) + the liability on the £100K BASED ON THE TAPER RELIEF CALC. Sorry but still not clear on this. Forget any other exemptions. Is my calc above correct?

It’s really quite simple. Taper relief ONLY applies if you have gifted over £325K.

Example 1. Gift =< £325k taper relief does not apply

Example 2. Gift = £400k no TR on the first £325k but is available on the remaining £75k.

Example 3. Your net worth is £1M and your home is worth at least £175k. You give your son £500k today and depending on when you die this will have the following impact on IHT.

Die in less than 3 years then no reduction in IHT which will be around £200k (40% of £500k) 
Die between 3 & 4 years and IHT is reduced by taper relief (40% on the first £325k, 32% on the remaining £175k) 
Die between 4 & 5 years and IHT is reduced by taper relief (40% on the first £325k, 24% on the remaining £175k) 

Die between 5 & 6 years and IHT is reduced by taper relief (40% on the first £325k, 16% on the remaining £175k) 

Die between 6 &  7 years and IHT is reduced by taper relief (40% on the first £325k, 8% on the remaining £175k) 
Die after years and the whole £500k becomes exempt.

All this assumes your remaining assets stay at £500k. 

If you really want to mitigate IHT and are still struggling to get your head round it you should take professional advice. 

theoretica

castle96 said:

Sorry, sorry. I am still confused ! PLEASE bear with me. NEED to know

How Inheritance Tax on a gift is paid

Any Inheritance Tax due on gifts is usually paid by the estate, unless you give away more than £325,000 in gifts in the 7 years before your death. Once you’ve given away more than £325,000, anyone who gets a gift from you in those 7 years will have to pay Inheritance Tax on their gift.

The 7 year rule

No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7 year rule.

If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.

Gifts given in the 3 years before your death are taxed at 40%.

Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.

Taper relief

Years between gift and death	Rate of tax on the gift
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7 or more	0%

Giving gifts you still benefit from   (from Gov site).

I cannot see that you have to have given away £325 before you get relief. Am I daft. Just cannot see it/

It is about nine lines from the bottom of your quote - just above the heading 'taper relief'  'Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.'

Under 325k is an all or nothing at 7 years.

castle96

Me again. Many thanks folks for bearing with me. Just to ensure I have fully understood/documented. Please work out/confirm, my estates current IHT liability for me, assuming I snuff it today - MANY THANKS

Divorced. Sole owner of house

ESTATE:

House £450
Cash   £225
        ---------
          £675      All to be split equally between 3 sons. (Q - I don't have to leave "the house" to them specifically to
                        qualify for the £175 RNRB, do I ? It's 'value' included in my total Estate is the same thing?)

In 3/2020, I gave each son £20k, so 3-4 yrs ago.


Tax due and calc.   ...........

Jeremy535897

castle96 said:

Me again. Many thanks folks for bearing with me. Just to ensure I have fully understood/documented. Please work out/confirm, my estates current IHT liability for me, assuming I snuff it today - MANY THANKS

Divorced. Sole owner of house

ESTATE:

House £450
Cash   £225
        ---------
          £675      All to be split equally between 3 sons. (Q - I don't have to leave "the house" to them specifically to
                        qualify for the £175 RNRB, do I ? It's 'value' included in my total Estate is the same thing?)

In 3/2020, I gave each son £20k, so 3-4 yrs ago.


Tax due and calc.   ...........

You said you are a widower. Did your wife use her nil rate bands, or leave everything to you?

castle96

"You said you are a widower". As above, DIVORCED long since (bless her). No allowances from her. Her - Remarried

Jeremy535897

Your estate is currently worth £675,000. Previous gifts are roughly £57,000 (assuming one annual exemption of £3,000). Nil rate band remaining £500,000 less £57,000 = £443,000. Tax is charged on £675,000 less £443,000 = £232,000, which at 40% = £92,800. The gifts will drop out of account 7 years after they were made. No taper relief is available, as the gifts did not exceed the nil rate bands. Leaving your estate entirely to your sons without specifically mentioning the house will suffice to qualify for the residential nil rate band.
https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band

castle96

1 x £3k? Dont I get 3x £3k + 1x£3k for the previous/1st yr