HMRC gains £700 million back in Inheritance Tax due to complex rules

In the last five years, HM Revenue & Customs (HMRC) has retrieved more than £700 million in Inheritance Tax (IHT) from 2,100 families who took steps to attempt to minimise significant tax charges.

Making gifts during your lifetime is a known method of managing and minimising IHT liabilities prior to your death but HMRC has ruled that many families breached regulations by doing this.

Lump sums of cash or gifting property can be IHT-free as long as the person lives another seven years after making these gifts.

Known as the seven year-rule, this tax relief sees the tax rate on gifts in excess of the Nil Rate Band tapered down as follows:

3 to 4 years – 32 per cent

4 to 5 years – 24 per cent

5 to 6 years –16 per cent

6 to 7 years – 8 per cent

7 or more – 0 per cent

A rule introduced in 1986, known as ‘gift with reservation of benefit’ has allowed HMRC to demand IHT if the person giving the gift continued to see benefits from it after gifting.

An example of this is if a parent continues to live in the same house after gifting and transferring ownership to their children.

Instead, if the parent wants the gift to remain IHT-free, they will need to either move out or pay rent to the new owner. This rent would need to be reviewed annually to ensure that it did not generate an IHT liability.

Regardless of paying rent, the seven-year rule to gifts for IHT purposes will still apply.

Many experts believe that the struggle for younger people to get on the property ladder is resulting in families taking more risks when it comes to gifting property and they are not considering the tax implications.

IHT is at a higher cost than ever, with the Office for Budget Responsibility estimating that IHT will bring in a record-breaking £7.2 billion in this tax year.

The now disbanded Office of Tax Simplification has previously stated that the seven-year period needed for gifts to be IHT free is too long and can make it difficult for families to keep records of gifts and how much IHT will be due.

For help and advice related to private client services, contact Gemma Hughes on or at 020 7240 0521.

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