IHT taper relief reduces the inheritance tax due on a gift when the person who gave it dies between three and seven years later. It scales down the tax on the gift itself, not the value, on a sliding scale that falls to nil after seven years.
In one line: IHT taper relief cuts the tax on a lifetime gift the longer the giver survives between three and seven years.
How IHT taper relief works
Gifts made within seven years of death can count towards an estate for inheritance tax. Taper relief applies only where the gift exceeds the available nil rate band, reducing the tax charge rather than the gift's value.
Imagine a 400,000 GBP gift made four to five years before death, with the nil rate band already used. The taxable excess attracts 40% tax, but taper relief reduces that charge by 40%, so the tax owed falls accordingly.
The relief rises in steps: tax is cut by 20% after three years, 40% after four, 60% after five, 80% after six, and reaches nil once seven years pass. Below three years there is no reduction.
Taper relief vs the nil rate band
The nil rate band is the tax-free threshold applied first. Taper relief only matters for the part of a gift above that band, because gifts within the band carry no tax to taper in the first place.
A common misunderstanding is that taper relief reduces the gift's value after three years. It reduces the tax on the gift, so it has no effect when the gift sits wholly within the nil rate band.
Primary source: GOV.UK: How Inheritance Tax works