Families trying to dodge inheritance tax by giving away their wealth are being caught out by unexpected ill health and the taxman.
Giving away assets such as cash or property is considered one of the easiest ways for someone to cut their inheritance tax bill, but families have to meet a series of small print rules.
The key element is to ensure that any assets are transferred at least seven years prior to an individual’s death. However, no one can of course be sure of meeting this requirement, largely due to unexpected health issues.
As a result, the number of estates paying inheritance tax on gifts has soared from 590 in 2011-12 to 1,080 in 2021-22, according to figures obtained by the wealth manager, Quilter, in a Freedom of Information request.
At the same time, the amount of tax paid on these gifts has doubled from £101m to £221m.
This is the most recent year that information is available because of delays relating to the collection of inheritance tax data, HM Revenue and Customs said.
The data suggests that families are increasingly making large lifetime gifts in an attempt to dodge inheritance tax.
And the figures could well rise significantly due to changes in the Rachel Reeves budget which has extended inheritance tax – at reduced rates – to farms and family businesses.
If a person dies within seven years of making a gift, then the gift will use up the nil-rate band before the rest of their estate. This means tax may be due on a lifetime gift if it is worth more than the £325,000 nil-rate band.
Inheritance tax is charged at 40 percent on the value of an estate worth more than £325,000. However, the residence nil-rate band lets homeowners pass on an extra £175,000 tax-free as long as they leave their main property to their children.
Couples can share their allowances, so they can leave behind £1m in total without worrying about paying inheritance tax.
If a person dies within seven years of making a gift, and that gift is worth more than the nil-rate band, then taper relief will apply on a sliding scale. This means the rate of tax due on the gift drops to 32 percent three years after death, 24 percent after four years and so on.
Increases in property prices are largely to blame for the fact that more estates are being dragged into the inheritance tax trap. At the same time, successive governments have frozen the thresholds at which the tax comes into effect.
As a result, the number of deaths and estates that will result in an inheritance tax bill is predicted to double to one in 10 by 2030.
Rachael Griffin, of Quilter, told the Telegraph: “As we celebrate the season of giving, it’s important to be aware of the potential tax implications of our generosity.
“Due to thresholds staying stuck in time while property prices and other asset prices continue to rise, more and more people will find themselves caught in the inheritance tax net. This means that a generous gift at Christmas time might just end up being liable for inheritance tax.
“Until the gift exemptions are modernised, and the nil-rate bands are brought up to date too, the number of estates paying inheritance tax on lifetime gifts will continue to increase.”
A spokesman for HM Treasury said: “The vast majority of gifts families make to loved ones each year fall outside the scope of inheritance tax, and the same proportion of estates pay tax on gifts per year as they have done on average over the last 10 years.
“More than 94 percent of estates will continue to pay no inheritance tax in 2024-25, and estates can pass on up to £1m without paying inheritance tax when a tax-free allowance is passed to a surviving spouse or civil partner.”
