A freedom of information (FOI) request to HMRC reveals the number of people paying inheritance tax (IHT) on gifts made before death is rising sharply
Gifts of any amount can be gifted at any time, but if the giftee passes away within seven years of the person receiving it the gift becomes taxable, and it could be added to the value of the estate for IHT.
In 2011/12 the total amount of estates ending up having to pay IHT for this reason was 590, rising steadily until 2020/21 when there were 1300 estates affected. Not only this but the amount of IHT collected has more than doubled in this time, from £101m to £256m.
The average each estate paid in 2020/21 is £25,000 more than ten years prior, paying £196,923 each.
This data suggests that some significant shock tax bills are being delivered to people. Those who receive generous gifts from older relatives need to be aware that they could be liable for a big tax charge if that relative dies within seven years of making the gift.
It is also possible that the number of families and the volume of IHT bills could mean more families are making lifetime gifts ‘in an effort to reduce the size of their estate as IHT becomes more of a burden’.
The nil rate is currently £325,000 and has been since 2009, while the residential NRB is £175,000, which has been frozen since 2020, with these freezes in place more families are realising the value of their estates is surpassing these figures, leading them to reduce the size of their estates.
It is predicted that more than 7% of all estates will be dragged into paying IHT by 2032/33, while the most recent figure shows just 4.4% were impacted by the tax in 2021/22.
However, data HMRC supplied through an FOI stated that 45% of people who had made large gifts were aware of the tax rules when gifting large amounts of money while alive. Additionally, just one quarter stated that they had a good awareness on the subject of IHT.
A significant point to take away from this for those planning the transfer of their assets to the next generation is that it can be quite tricky to make lifetime gifts that are 100% safe from IHT and it’s often worthwhile seeking expert advice.
Anyone receiving a big gift from an elderly relative might want to assess the tax situation before they either spend it all or invest it into something illiquid (i.e. not quickly converted to cash) like a property.
