HMRC claws back £700million in IHT after families fail to understand gifting rules

In the last five years, HM Revenue & Customs (HMRC) has retrieved more than £700 million in Inheritance Tax (IHT) from 2,100 families who had failed to understand the rules relating to gifting assets.

Making gifts during your lifetime is a recognised method of managing and minimising IHT liabilities prior to your death but HMRC ruled that many families had breached regulations by doing this.

Lump sums of cash or gifting property can be IHT-free providing the individual lives a further seven years after gifting these things.

Known as the ‘seven year-rule’, this tax relief sees gifts from an estate tapered down as follows:

Years between gift and death Rate of tax on the gift:

  • 3 to 4 years – 32 per cent
  • 4 to 5 years – 24 per cent
  • 5 to 6 years –16 per cent
  • 6 to 7 years – 8 per cent
  • 7 or more – 0 per cent

A rule introduced in 1986, known as ‘gift with reservation of benefit’ has allowed HMRC to demand IHT if the person giving the gift continued to see benefits from it after gifting.

An example of this is if a parent continues to live in the same house after gifting and transferring ownership to their children.

Instead, if the parent wants the gift to remain IHT-free, they will need to pay rent to the owner and this would need to be reviewed to ensure that it did not generate an IHT liability.

Regardless of paying rent, the seven-year rule to gifts for IHT purposes will still apply.

Many experts believe that the struggle for younger people to get on the property ladder is resulting in more risks when it comes to gifting property and not considering IHT bills.

IHT is at a higher cost than ever, with the Office for Budget Responsibility estimating that IHT will bring in a record-breaking £7.2 billion in this tax year.

The now disbanded Office of Tax Simplification had previously stated that the seven-year period needed for gifts to be IHT-free is too long and can make it difficult for families to keep records of gifts and calculate how much IHT will be due.

There are many options to help minimise IHT on your estate and pass more wealth to the next generation. Our Partner, Heather Bright, who specialises in Inheritance Tax matters, will work on your behalf to ensure that your tax liability is minimised so that more of your hard-earned money stays with you, your business and, eventually, your loved ones.

Because we stay ahead of the curve, we will make sure that any changes to the tax regime are reflected in our advice to you.


To find out more, please get in touch with Heather.