More than a thousand UK households are facing unexpected inheritance tax bills after gifting money to loved ones, as HM Revenue & Customs (HMRC) cracks down on complex gift rules.
Sharp Rise in Inheritance Tax on Gifts
New data reveals a dramatic increase in the amount of inheritance tax (IHT) collected on cash gifts. Figures obtained via a Freedom of Information request by financial advisers Continuum show that HMRC collected £256 million in IHT on gifts during the 2020-21 tax year. This represents a staggering increase of over 153% compared to the £101 million collected a decade earlier in 2011-12.
The number of estates forced to pay this levy has also skyrocketed. Over the same ten-year period, the figure ballooned by more than 120%, climbing from just 590 estates to 1,300 estates.
Families Tripped Up by Complex Rules
Financial experts warn that well-meaning families are being caught out by intricate regulations, particularly the notorious seven-year rule. This rule means that larger financial gifts can be pulled back into an estate's value for IHT purposes if the person who made the gift dies within seven years of giving it.
While many people are aware of basic allowances like the £3,000 annual gift exemption or wedding gift allowances (£5,000 for parents, £2,500 for grandparents), a powerful exemption is often overlooked. It is possible to make unlimited gifts out of normal excess income, completely free of the seven-year rule.
However, the criteria are strict. The gifts must be made from regular income, not from savings or capital, and HMRC will scrutinise whether the donor retained sufficient income to maintain their usual standard of living after making the gift.
Advisers Urge Caution and Planning
Ben Alcock, a Chartered Financial Planner at Continuum, highlighted the risks. "The cost of living crisis continues to hit many clients’ families hard, and many may be looking to make large gifts to help," he said.
"However, financial advisers must ensure clients understand the potential tax consequences. Giving money away during your lifetime can reduce your estate's value, but the taxman is wise to this. Without care, you could end up making a large financial gift to HMRC instead of your family," Alcock cautioned.
He emphasised that inheritance tax is complicated and advised that professional guidance is crucial to navigate the maze of regulations, minimise the tax burden, and provide real value to families.
The average IHT bill on gifts has also risen sharply, from £171,186 per estate in 2011-12 to £196,923 in 2020-21, adding further financial pressure on affected households.
