Families warned on surprise inheritance tax bills as more gifts come with tax sting in the tail

The number of families being caught out by tax bills after death on gifts made in lifetime has been surging, figures obtained by wealth management firm Evelyn Partners show.

Large gifts can be made at any time but if the giver dies within seven years then the gift itself could be taxable or it could be included in the estate for the calculation of Inheritance Tax (IHT).

The number of estates that paid IHT on gifts made less than seven years before death more than doubled from 590 in 2011/12 to 1,300 in 2020/21, according to HM Revenue and Customs data obtained by a Freedom of Information request submitted by Evelyn Partners.[1]

Meanwhile, the total sum of IHT paid on gifts also more than doubled from £101 million in 2011/12 to £256 million in 2020/21 - an increase of 153% in monetary terms and 119% in real terms.[2] The data suggests the average tax charge payable by beneficiaries on lifetime gifts was £171,186 in 2011/12 and £196,923 in 2020/21.

Ian Dyall, Head of Estate Planning at leading wealth management firm Evelyn Partners, said: “This data suggests that some pretty 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.

“These figures show that a growing number of recipients will have had a potentially unexpected IHT bill to pay, when the donor dies, on a gift that they could have received several years ago. How many had the liquid assets available to pay it? How many had invested the money in illiquid assets like a new home?”

The Potentially Exempt Transfer (PET) rules dictate that gifts which in each year exceed the annual gifting allowances take seven years to leave the estate of the donor – at which point they will be exempt from any IHT.[4]

Dyall continues: “The fact that both the number and size of inheritance tax bills on lifetime gifts more than doubled between 2011/12 and 2020/21 suggests that an increasing number of families are making lifetime gifts – possibly in an effort to reduce the size of their estate as IHT becomes more of a burden.

“With both the nil rate band of £325,000 and the residential NRB of £175,000 in a multi-year freeze, more estates are becoming liable to IHT – but also more assets in each liable estate are taxable.”[5]

While the most recent HMRC statistics show that 4.4 per cent of estates paid IHT in 2021–22, the rapid growth in wealth among older individuals means this number is set to rise to over 7 per cent by 2032–33.[6] The number of people affected by IHT will be still larger: one in eight people, or 12 per cent will have IHT due either on their death or their partner’s death by 2032–33.

Dyall adds: “What we could be seeing here is more families over the years making large lifetime gifts because they want to support their children or grandchildren. Among some families there could be a growing awareness that such gifts could reduce the size of their estate so it’s a conscious tactic - but the gifter just doesn’t live long enough for the estate to reap the full tax benefit.

“The data could alternatively show among other families a lack of awareness or a misunderstanding of the rules. HMRC’s own research has suggested that only 45 per cent of gifters were aware of IHT rules or exemptions when they gave their largest gift, and only a quarter displayed a working knowledge of IHT rules.[7]

“It’s worth pointing out that this data does not even include all estates that might have had to pay IHT tax on lifetime gifts because for plenty of families the cumulative total of gifts made in the seven years before death doesn’t itself exhaust the nil-rate band. These gifts, where the estate rather than the recipient becomes liable for the tax, are not counted in these figures.[8]

“A big lesson 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 plough it into something illiquid like a property.

“Suddenly having to settle a surprise 40% tax bill on a large sum will be a challenge for many people.

“It is easy to exceed the annual gifting allowances - unwittingly or otherwise - as these exemptions have been frozen at their current levels since 1981 and would be far more generous had they risen with inflation. One of the few ways around these relatively meagre allowances - without the gifts counting as PETs - is to make regular gifts out of surplus income.”[9]

Ian Dyall concludes: “There are many good reasons why a wealthy saver might want to give substantial amounts away, not least the desire to help out young relatives – after all, the giver will not get the satisfaction of seeing how their generosity has helped others if they have passed away.

“But such lifetime gifts could also help to save on the future IHT bill payable by the beneficiaries of the estate.

“If the gifter lives for more than seven years, the gift will reduce the size of the estate for IHT purposes and even if they don’t, under certain circumstances the IHT bill could be reduced through the sliding scale known as ‘taper relief’.” [10]

NOTES

[1]FOI request made 17 July 2024. 
The latest year for which HMRC could provide the data requested is 2020/21 due to delays in the winding-up of estates, the payment of taxes and the digitisation of information: “Due to these delays, the latest year of death for which detailed analyses of assets, reliefs and exemptions are given is two full financial years before the end of the current tax year.”
[2] If the 2011/12 total of £101million had risen with CPI inflation, it would have been worth around £117million by 2021.

[3] HMRC attached the following clarifications to the data:

•    It is the value of gifts given during the PET period that is important for the IHT tax calculation, rather than the number. As such, many individual gifts are often combined when being captured into our administrative systems.

•    The figures in this table relate to the net value of lifetime gifts only. Since many lifetime gifts qualify for exemptions and allowances, such as the annual gifts allowance or the small gifts exemption, only the net value of such lifetime gifts after the deduction of any applicable exemptions or allowance is captured.

•    While some taxpaying estates contain lifetime gifts, only a subset of those will have had to pay IHT on the gifts given, since those gifts will have been large enough to exhaust any available nil-rate band. Where lifetime gifts are below the NRB, data is not available [see note 8 below].

[4] Annual gifting allowances:
•    Total gifts made by you in a tax year of £3,000 – or £6,000 for a couple. You can also carry forward any unused £3,000 allowance from the previous tax-year.  
•    Small gifts of up to £250 can be made to any number of people in the tax year, provided the total to any one person does not exceed £250. If it does, this exemption does not apply and all gifts would start to use up the aforementioned £3,000 allowance.  
[5] The main NRB has been frozen at £325,000 since April 2009. The residential NRB has been kept at £175,000 since April 2020. Both allowances are set to remain unchanged until 2027/28.

[6] IFS, September 2023

[7] Lifetime gifting: reliefs, exemptions and behaviours research - GOV.UK (www.gov.uk)

[8] At first, gifts simply erode the nil rate band, and can increase the tax due on the estate paid by the executors. But once the cumulative total of gifts over a seven-year period exceeds the nil rate band, the beneficiaries of the gifts become liable for the tax – but the rate can be subject to ‘taper relief’ [see note 10 below].

[9] The ‘normal expenditure out of income’ exemption will apply even if you die within seven years of the last gift, as long as three key rules are met: 
•            The gifts must be made out of your income  
•            They form a part of your ‘normal expenditure’ and are paid out on a regular basis  
•            The payments should not have any impact on your own standard of living  
Then the gifts will be exempt from IHT and neither the recipients nor the estate will pay tax on them.

[10] Taper relief only applies if the total value of gifts made in the seven years before you die is over the £325,000 tax-free threshold. Gifts given in the three years before your death are taxed at 40%, three to four years 32%, four to five 24%, five to six 16%, six to seven 8%.

ENDS

Disclaimer  
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.  
Issued by the Evelyn Partners group of companies (the 'Group') which comprises Evelyn Partners Group Limited and any subsidiary of Evelyn Partners Group Limited from time to time.   
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