IHT Lifetime Gifting ‘Tax Trap’

News that HMRC has pulled in almost £650m due to complex inheritance gifting rules in the past three years, has once again highlighted the need for careful estate planning by families. Whilst the overall tax receipts from Inheritance Tax (IHT) between April 2022 and February 2023 were £6.4 billion, the focus of this latest news is on the proportion collected as a result of gifts made by the deceased in the period leading up to their death.

The amount derived from tax charged on gifts has been steadily increasing from £197m in 2017/18, up to £244m in 2019/20. In 2018/19 the figure was £201m, creating a total of £644m in three years. This mirrors the increase in IHT receipts generally, with HMRC collecting £0.9 billion more in 22/23 than in 21/22.

The gifting rule

The gifting rule provides an opportunity for an individual to give money or assets of up to £3,000 in value to a loved one, friend or family member, each tax year, without falling foul of IHT. So as an example, they could give a total of £25k away to 10 members of their family (£2,500 each) prior to their death without encountering IHT.   

The limit of £3,000 is assumed to be sufficient to cover specific one-off gits such as weddings, whilst controlling the transfer of money or assets that would otherwise attract IHT or count towards the overall estate value. Gifts of more than £3,000 are typically subject to up to 40% IHT if the giver dies within seven years of making them.

Property values drive IHT

One of the reasons for more gifts falling prey to IHT charges is the rise in property values pushing overall estate values into IHT territory. This has been a consistent theme for decades as inherited wealth accumulates and property prices rise.

Any gifts that are beyond the £3,000 limit and have been made within the seven years immediately preceding the death, can become part of the overall estate value and can therefore be taxed retrospectively. With house prices increasing by as much as 10% per annum in recent years, a gift made five years before the death may, at the time, not have pushed the estate beyond the IHT threshold. But when the property rises in price for the next five years and creates an estate valuation that does attract IHT, HMRC will demand tax on the original gift. HMRC only look at the value of the estate at the time of death and not at the time of gifting.

Better estate planning

All this means careful estate planning is required to avoid retrospective IHT charges and to minimise the likely IHT demand on death. In addition to the gifting rule, there are transferable allowances on the family home and other allowances that can help mitigate IHT legally. Trusts, certain investments and school fees are just some of the ways families can transfer and retain accrued wealth and reduce IHT charges and we would always recommend seeking suitably qualified advice to ensure your will is tax efficient.