HM Revenue and Customs (HMRC) has issued inheritance tax demands to more than 14,000 UK households following unsuccessful attempts to reduce estate values through lifetime gifts.
The Seven-Year Rule and Tapered Relief
Official data from HMRC reveals that 14,030 gifts became subject to inheritance tax during the 2022-23 financial year. The tax authority has contacted households where a benefactor passed away before the crucial seven-year gifting period had concluded.
Under the current inheritance tax rules, gifts given less than seven years before death may be included in the deceased's estate for tax purposes. However, a system of tapered relief applies if death occurs between three and seven years after the gift was made. This can trigger reduced tax rates ranging from 8% to 32%, depending on the exact timing.
Mainstream Strategy Leads to Costly Mistakes
Michelle Holgate, a financial planner at investment firm RBC Brewin Dolphin, commented on the trend. "Strategic gifting was once seen as a tactic of the super-affluent, but has now gone mainstream," she warned.
Ms Holgate noted a particular increase in inquiries from farmers and family business owners. "We're getting inquiries in particular from farmers looking to pass on assets such as land to the next generation without triggering a big inheritance tax bill," she explained. "People are naturally protective of family businesses, which in some cases have been built up over several generations. They want to keep these businesses in the family and see them thrive long into the future."
Substantial Bills for the Wealthiest Families
The financial consequences of these 'failed gifts' can be severe. The data shows that some wealthy families faced tax bills exceeding £3 million after relatives died within seven years of receiving valuable gifts of cash or assets.
An analysis of the largest cases found that the 25 biggest 'failed gifts' were worth an average of £7.9 million each after allowances and exemptions were applied. A gift of this size would incur an approximate £3.1 million inheritance tax bill if the donor died within three years of making it.
Across all cases, the average value of a failed gift after allowances was £171,000. If the donor's death occurred within three years, this would typically attract a tax charge of around £68,400.
The situation underscores the importance of careful estate planning. Inheritance tax may be payable on gifts you've given during your lifetime if you die within seven years. The final liability depends on the recipient's relationship to you, the gift's value, and precisely when it was given. Experts strongly recommend seeking professional advice from a solicitor or tax adviser to understand what can be given away tax-free.
