Taper Relief and Gifts out of Excess Income: a guide
7 August 2023
Inheritance Tax (“IHT”) is often dubbed “Britain’s most hated tax” and causes people to try and minimise the IHT bill attached to their estate by giving away their assets prior to death.
For many people, engaging in estate planning is a sensible thing to do to mitigate against a sizeable IHT bill.
However, for estate planning measures to actually be effective they must be carefully arranged, and it is important that the principles of any planning undertaken are understood.
There are two areas in particular where there are a lot of common misconceptions: Taper Relief and Gifts out of Excess Income.
To avoid paying IHT on cash within your estate, gifting money to your beneficiaries during your lifetime can sometimes be an advisable thing to do. However, if you fail to survive seven years from the date of these gifts, the value will still be considered part of your estate by HMRC.
If you die between three and seven years after making a gift, the amount of IHT payable by your estate will be reduced on a sliding scale, known as ‘Taper Relief’. However, this “relief” is not quite as it seems.
The first thing to remember is that Taper Relief only reduces the IHT payable not the amount of the gift.
Any gift you made in the seven years before you died uses up the Nil Rate Band allowance first, which is the IHT allowance each individual has on their death of £325,000. So, if you make gifts totalling less than the Nil Rate Band in the seven years before you died then there will be no IHT to pay on the gifts.
In effect, Taper Relief only applies to the part of the gift you have made which is in excess of the Nil Rate Band.
Therefore, the reality is that the only people who benefit from Taper Relief are those that give away significant sums of money.
Gifts out of Excess Income
If you make regular payments to beneficiaries during your lifetime, this can fall outside your estate for IHT purposes even if you do not survive the gifts by seven years. However, for this exemption to be applicable you must be making these payments out of surplus income. This means they cannot come from capital, and you must still have enough income remaining to maintain your usual lifestyle.
When the time comes, applying for this IHT exemption from HMRC can prove challenging for your executors once you pass away.
A large amount of information in relation to income and expenditure must be provided to HMRC by your executors. It is therefore important that all gifts made out of excess income are reliably and accurately recorded, along with all your income and expenditure for those tax years. It is important that your executors are aware of these records and any supporting evidence is kept.
The Birketts view
Experienced professional advice should be sought before either relying upon Taper Relief or making Gifts out of Excess Income. This is to ensure that you have understood these gifting rules and how they impact your IHT bill properly before gifting assets away.
Birketts’ Private Client Team is multi-disciplinary and able to advise you on all areas of estate planning. If you would like any further advice, please contact the Private Client Team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at August 2023.