Inheritance tax for bereaved who face big bills for cash gifts rises | Personal finance

The number of families hit with inheritance tax due to gifts has more than doubled in the last decade.

People can avoid paying Inheritance Tax (IHT) when cash and assets are passed on to family members at least seven years before their death.

However HMRC recovers hundreds of millions of pounds through the ‘death tax’ each year on gifts that do not comply with the seven-year rule.

The number of estates paying IHT on gifts doubled from 590 in 2011-12 to 1,300 in 2020-21, according to data obtained by wealth manager Evelyn Partners through a freedom of information request.

The value of IHT collected on gifts more than doubled, rising from £101m in 2011-12 to £256m in 2020-21.

Chancellor Rachel Reeves is said to be planning major changes to what has been described as Britain’s most hated tax in her October Budget to bring in billions of pounds of extra tax revenue from bereaved people.

As a result, tax experts have reported an increase in demand from people looking for ways to protect their wealth and the legacy they can pass on.

The seven-year rule is a useful relief for families, allowing large gifts, such as money for house deposits and university fees, to be made tax-free

Ian Dyall of Evelyn Partners said: “More families are making gifts during their lifetime in an attempt to reduce the size of their estate as more estates become liable to IHT, and that is a growing burden.

“In some cases, the donor simply does not live long enough for the estate to receive the full tax benefit. But in other cases, there is a lack of awareness or a misunderstanding of the rules surrounding gifts.”

Currently, inheritance is paid only by about 4 percent of estates. Despite this, the Government collected a record £7.5 billion in IHT in 2023-24.

Around £2.8bn of IHT was paid between April and July, up £200m on the same period a year ago.

Inheritance tax is usually charged at 40 per cent on estates valued above the £325,000 threshold. Anyone who leaves a family home to a direct descendant receives an additional £175,000 tax-free allowance, provided their estate is worth £2m or less. This allowance is reduced by £1 for every £2 the estate exceeds £2 million.

Anything left to a spouse or partner is exempt from tax, and a partner’s contribution can also be inherited, meaning couples can transfer up to £1m tax-free.

Gifts made in the three years before death can be taxed at 40 percent and those given between three and seven years before death are taxed on a sliding scale, starting at 32 percent and dropping to 8 percent. Gifts made more than seven years before death are tax-free.

Mr Dyall said: “It can be quite tricky to make lifetime gifts that are completely safe from IHT and suddenly having to pay a 40 per cent surprise on a large sum will be a challenge for many people.

“Anyone who receives a large gift from an elderly relative may want to assess the tax situation before either spending it all or plowing it into something illiquid like real estate.”

Nimesh Shah of accounting firm Blick Rothenberg told Sundat Times that people are often caught leaving it too late to give gifts.

“Nobody wants to think about death and taxes, so they put it off. But as you get older, it’s obviously less likely that you’ll survive the full seven years, so it’s important to plan early. There’s also a common misconception that if you give away an asset then you are free from IHT,” he said.

A Treasury spokesman said: “Following the spending review, the Chancellor has been clear that tough decisions lie ahead on spending, welfare and tax to fix the foundations of our economy and tackle the £22 billion hole in the public finances left by the last government submitted. Decisions on how to do it will be made in the budget in the round.”

Inheritance tax for bereaved who face big bills for cash gifts rises | Personal finance | Finance

Inheritance tax for bereaved who face big bills for cash gifts rises | Personal finance | Finance