Understanding inheritance tax (IHT) can be tricky, especially during emotionally draining times like the loss of a loved one. The Telegraph’s expert looked into a reader’s situation that involves a sizable gift from a deceased mother, a house sale, charitable donations, and some confusion over taper relief.

The £150,000 Gift Saga

The reader starts with a rather distressing situation. After her father’s passing, her mother sold a house she had inherited and divided the £300,000 proceeds between her and her sister, giving each £150,000.

The crux of the issue? The reader believes that a tax relief called “taper relief” should reduce the taxable amount of this gift by 80%. HMRC, the UK’s tax collection authority, disagrees.

Decoding Taper Relief

Taper relief for inheritance tax can be a tad complex. But here’s a simplified breakdown:

• Every UK resident gets an IHT-free allowance, known as the “nil-rate band”. Since April 6, 2009, this amount has been frozen at £325,000 and will remain so until at least April 5, 2028.
• When a person gives a gift, this allowance decreases by the value of that gift for seven years. If the reader’s mum had lived another year, the entire gift would’ve been free from inheritance tax. But, unfortunately, she passed away six years after giving the gift.
• Taper relief starts to kick in three years after giving a gift. It starts at 20% and rises 20% each subsequent year. By year seven, the gift isn’t liable for inheritance tax at all.
• But—and here’s the tricky part—taper relief only applies to gifts that exceed the £325,000 limit.

So, for the reader’s situation, since the £300,000 gift was entirely within the £325,000 allowance, taper relief doesn’t come into play. Had the gift been larger, say £425,000, the relief would’ve applied to the amount over the £325,000 threshold.

The Charitable Donations Confusion

Now, onto the second quandary. The reader’s mum made charitable donations during her life. While charitable gifts to UK registered charities are exempt from IHT, they don’t affect the £325,000 allowance. So, these donations neither increase the estate’s taxable value nor decrease the inheritance tax owed after death.

The confusion might arise from a reduced IHT rate of 36% (compared to the usual 40%) available when at least 10% of the estate left upon death goes to qualifying charities. However, gifts given during one’s lifetime don’t qualify for this reduction.

Wrapping It Up

In summary, HMRC’s stance on both counts appears to be accurate:

1. The £300,000 gift from the reader’s mum doesn’t qualify for taper relief as it was within the £325,000 nil-rate band.
2. The charitable donations made during her mum’s lifetime can’t be used to reduce the inheritance tax owed.