The number of families having to pay inheritance tax because of gifts has more than doubled in the last decade.
Inheritance tax can be avoided if cash and assets are passed on to family members at least seven years before death.
However, HMRC recoups hundreds of millions of pounds each year through ‘inheritance tax’ on gifts that do not comply with the seven-year rule.
The number of estates paying inheritance tax on gifts has doubled from 590 in 2011-12 to 1,300 in 2020-21, according to data obtained by asset manager Evelyn Partners following a Freedom of Information Act request.
The value of inheritance tax levied on gifts has also more than doubled, from £101 million in 2011-12 to £256 million in 2020-21.
Chancellor Rachel Reeves is said to be planning sweeping changes to what is considered Britain’s most hated tax in her budget due in October, with the aim of raising billions of pounds in extra tax revenue from bereaved families.
As a result, tax experts report a sharp increase in demand from people looking for ways to protect their wealth and the inheritance they can pass on.
The seven-year rule is a useful relief for families because it allows large gifts, such as money for a down payment on a home or college tuition, to be made tax-free.
Ian Dyall of Evelyn Partners said: “More and more families are making gifts over their lifetime to reduce the size of their estate as more and more estates become subject to inheritance tax and this becomes a growing burden.
“In some cases, the donor simply does not live long enough for the estate to receive the full tax benefit. In other cases, however, there is a lack of awareness or a misunderstanding of the rules surrounding gifts.”
Currently, only around 4 percent of estates pay inheritance tax. Despite this, the government has raised a record £7.5 billion in inheritance tax in 2023-24.
Between April and July, around £2.8 billion in inheritance tax was paid, £200 million more than in the same period last year.
Inheritance tax is usually charged at 40 per cent on estates valued above the £325,000 threshold. Anyone who leaves a family home to a direct descendant will receive an additional tax-free allowance of £175,000, provided their estate is worth £2 million or less. This allowance is reduced by £1 for every £2 that the estate exceeds the £2 million threshold.
Anything left to a spouse or civil partner is exempt from tax and a partner’s allowances can also be inherited, meaning couples can pass on up to £1 million tax-free.
Gifts made in the three years before death can be taxed at 40 percent. Gifts made between three and seven years before death are subject to a sliding scale that starts at 32 percent and goes down to 8 percent. Gifts made more than seven years before death are tax-free.
Mr Dyall said: “It can be quite difficult to make lifetime gifts completely free of inheritance tax and suddenly having to pay a surprise 40 per cent tax bill on a large sum will be challenging for many people.
“Anyone who receives a large gift from an elderly relative should consider the tax situation before either spending all of the money or putting it into something illiquid like real estate.”
Nimesh Shah of accounting firm Blick Rothenberg told Sundat Times that people often fall into a trap of starting gift-giving too late.
“Nobody wants to think about death and taxes, so they put it off. But of course, as you get older, you’re less likely to survive the full seven years, so it’s important to plan early. There’s also a common misconception that if you give away a fortune, you’re exempt from inheritance tax,” he said.
A Treasury spokesman said: “Following the spending review, the Chancellor of the Exchequer has made clear that difficult decisions are ahead on spending, benefits and tax to repair the foundations of our economy and plug the £22 billion hole in the public finances left by the last government. Decisions on how to do this will be made as part of the draft budget.”
