The 60% inheritance tax trap — and how a Bedfordshire family avoided it

Most people know that inheritance tax runs at 40%. What far fewer people realise is that for estates between £2 million and £2.7 million, the effective rate can climb as high as 60%. A little-known tapering rule quietly erodes one of the most valuable reliefs available. Here is how the team at Caliber Financial Management helped one local family understand their exposure and take decisive action.

Why estates over £2 million face a steeper tax rate

The residence nil rate band (RNRB) allows individuals to pass on an additional £175,000 tax-free when their home forms part of their estate and passes to direct descendants. For a couple, that can mean up to £350,000 of additional relief on top of the standard nil rate bands, which is a significant saving.

However, the RNRB does not apply in full to every estate. For estates valued above £2 million, HMRC tapers the relief away at £1 for every £2 of excess value. As a result, an estate worth £2.3 million loses £150,000 of RNRB, and a couple’s combined estate at that level loses £300,000 of relief altogether.

The 60% effective rate explained

For every additional £2 that pushes an estate over the £2 million threshold, £1 of RNRB disappears. That lost £1 of relief then becomes subject to 40% IHT, so the effective tax rate on assets inside this tapering zone is 40% plus 20%, giving a combined rate of 60%.

This applies to estates between £2 million and £2.7 million, or £2 million to £2.35 million for a single person. It is one of the steepest marginal tax rates anywhere in the UK tax system. Most families in this position are completely unaware of it.

Our client’s position

Our clients came to us with an estate valued at £2.3 million. Because the estate exceeded the £2 million threshold by £300,000, their combined RNRB was reduced by £150,000 each, wiping out £300,000 of combined tax-free allowance. In effect, assets inside the tapering zone attracted a rate of 60p in the pound, not the 40p that most families expect.

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£2.3m — Total estate value
£300k — Combined RNRB lost to tapering
60% — Effective IHT rate in the tapering zone

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The solution: a discretionary trust and the seven-year rule

Working closely with the family, our Ampthill-based advisers put a discretionary trust in place to begin moving assets outside of the taxable estate. By gifting into a trust, those assets start their journey away from the IHT calculation, and they begin to address the tapering problem directly.

Reducing the estate below £2 million does not just remove assets from the 40% IHT charge. It also restores the RNRB, recovering relief that the tapering rule would otherwise have erased entirely. This double benefit is what makes planning at this level so impactful.

The seven-year rule underpins this strategy. Provided the person making the gift survives seven years, the transfer falls completely outside their estate for IHT purposes. Between three and seven years, taper relief on the gift itself applies on a sliding scale. There is therefore real and meaningful value in acting sooner rather than later.

How the seven-year rule works

Gifts made more than seven years before death are exempt from inheritance tax entirely. Between three and seven years, taper relief reduces the effective IHT rate on the gift on a sliding scale, from 32% at years three to four, down to 8% at years six to seven. For families across Bedfordshire, Hertfordshire and Buckinghamshire, the message is clear: the sooner planning begins, the more effective it becomes.

The growth advantage

One of the most compelling and often overlooked benefits of trust-based IHT planning is what happens to growth inside the trust. Once you place assets outside the estate, any investment growth they generate also stays outside the estate. In other words, the family does not just remove the capital, they remove the future growth too.

Over time, this can make a considerable difference. A portfolio or property that appreciates in value after the transfer will not count towards the eventual inheritance tax calculation. The benefit of planning therefore compounds alongside the assets themselves.

The outcome

By taking action now rather than waiting, this Bedfordshire family has set in motion a plan that could, given time, remove a meaningful portion of their estate from the reach of inheritance tax altogether. The discretionary trust provides flexibility, the seven-year clock is now running, and the RNRB is on course to return in full. The family has the peace of mind that comes from having a clear, considered plan in place.

Every estate is different, and the right approach will depend on individual circumstances. However, for families across Beds, Herts and Bucks with estates in the £2 million to £2.7 million range, the combination of RNRB tapering and the 60% effective rate makes early, well-structured planning not just worthwhile. It makes it urgent.

Is your estate caught in the 60% trap?

Caliber Financial Management provides independent financial advice to clients across Bedfordshire, Hertfordshire and Buckinghamshire. If your estate is approaching or above £2 million, the time to plan is now. Get in touch with our team in Ampthill to find out where you stand. Email contact@caliberfm.co.uk or call 01525 375286.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only. All information is correct at the time of writing and is subject to change in the future. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change. The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, trusts, Lasting Powers of Attorney, or will writing.