How does inheritance tax taper relief work?
Inheritance tax, also known as estate tax, is a tax levied on the estate of a deceased person. It can be a complex and challenging aspect of estate planning, especially for individuals with substantial assets. One of the key concepts in inheritance tax planning is taper relief. This article aims to explain how inheritance tax taper relief works and how it can benefit individuals and their estates.
Taper relief is a tax relief mechanism designed to reduce the amount of inheritance tax payable on certain assets that have been held for a long period of time. The relief is available on assets that have been held for at least two years before the individual’s death, and it can significantly reduce the tax burden on the estate.
The taper relief works by applying a percentage reduction to the value of the asset each year, up to a maximum of 50%. The percentage reduction is known as the taper rate, and it increases gradually over the years. For assets held for two years, the taper rate is 20%; for assets held for three years, it is 40%; and for assets held for four years or more, it is 60%. The taper rate continues to increase until it reaches 100% after eight years.
To understand how taper relief works, let’s consider an example. Suppose a person has a property worth £1 million, which they have owned for seven years. The value of the property is subject to inheritance tax, but due to taper relief, the tax liability will be reduced. The taper rate for a property held for seven years is 60%, so the taxable value of the property will be reduced by 60%. This means that only £400,000 of the property’s value will be subject to inheritance tax, resulting in a lower tax bill.
It is important to note that taper relief is only available on certain assets, such as property, shares, and certain investments. It does not apply to life insurance policies, death benefits from pension schemes, or other assets that are not subject to inheritance tax.
Furthermore, taper relief is not automatic. Individuals must claim it by completing the relevant sections of their inheritance tax return. Failure to claim taper relief could result in an incorrect tax assessment and potential penalties.
In conclusion, inheritance tax taper relief is a valuable tool for estate planning, as it can significantly reduce the tax burden on assets held for a long period of time. Understanding how taper relief works is crucial for individuals and their advisors to ensure that the estate is managed effectively and that the tax liability is minimized. By taking advantage of taper relief, individuals can leave a more substantial legacy for their loved ones while minimizing the impact of inheritance tax.
