HM Revenue & Customs is taking action against 1,300 individuals for financial gifts made to family and friends, with inheritance tax payments on such gifts seeing a dramatic increase in recent years.
Sharp Rise in Gift Tax Revenue
New figures obtained through a Freedom of Information request by financial firm Continuum reveal that the proportion of inheritance tax paid on gifts has increased by over 153% since 2011. In the 2020-21 tax year alone, HMRC collected £256 million in IHT payments on gifts.
The number of people paying inheritance tax on gifts has also seen a substantial rise, increasing by more than 120% since 2011. During the 2020-21 tax year, exactly 1,300 individuals were required to pay this tax on monetary gifts to loved ones.
Growing Financial Burden on Estates
The average amount paid by estates subject to inheritance tax on gifts has shown a significant upward trend. In the 2011-12 tax year, estates paid an average of £171,186 in IHT on gifts. By the 2020-21 tax year, this figure had risen to £196,923.
Ben Alcock, Chartered Financial Planner at Continuum, commented on the concerning trend: "The cost of living crisis continues to hit many clients' families hard, and many of them may be looking to make large gifts to their loved ones in order to help."
Understanding the Tax Rules
Financial experts are urging caution and better awareness of inheritance tax regulations. The seven-year rule allows individuals to give away surplus income from employment, property, pensions, interest and dividends without inheritance tax implications.
However, this rule does not apply to gifts made out of excess income. The regulation permits taxpayers to give away unlimited sums of money without facing inheritance tax liabilities - provided the money comes from income rather than capital.
Alcock emphasised the importance of professional advice: "IHT is complicated, you should not assume that your clients know the rules. Helping them through the maze of regulations will not only help minimise the tax burden, but can also be a good way to prove your value to your client and their loved ones."
He added a stark warning: "Giving money away while you are still alive could reduce the amount in your estate, but the taxman is wise to this choice. Your clients need to be careful or they could end up making a large financial gift to the taxman."
