Inheritance tax and Gifts – don’t get caught out

A recent Freedom of Information (FOI) request submitted to HM Revenue & Customs (HMRC) has revealed some shocking figures on the number of estates paying Inheritance tax (IHT) on gifts that don’t comply with the seven-year-rule.  

The figures revealed the number of estates paying IHT on gifts more than doubled from 590 in 2011-12, to 1,300 in 2020-21. Equally, the amount HMRC collected on gifts also more than doubled, from £101m in 2011-12 to £256m in 2020-21, demonstrating yet another stealth tax to add to the rapidly growing list of ways the Government covertly increases their tax coffers. And as more and more people are now gifting money to their children to get on the property ladder, the problem is only getting bigger!

The seven-year-rule

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. HMRC will investigate any gifts where it suspects that tax has been underpaid or avoided.

Under the rule, certain gifts are tax-free if the donor lives for at least seven years after making them. If the donor dies before then, the gift is included in their estate and may be taxed, depending on the estate’s value.

However, gifts made in the three years before death can be taxed at 40% and those given between three and seven years before death are taxed on a sliding scale, starting at 32% and falling to 8%. This means that gifts must be given more than seven years before death to be tax-free.

What is IHT?

Inheritance Tax (IHT) is a tax levied by the Government on the estate of a deceased person in the UK. This includes all of their assets including property, personal belongings, and investments.  

However, this levy only applies to the total value of the estate that exceeds the IHT threshold or ‘nil-rate band’. As of the 2024/25 tax year, the threshold is set at £325,000. Anything above £325,000 could be subject to up to 40% inheritance tax and anything below this threshold is tax-free. 

In addition to this is something called the residence nil-rate band (RNRB). Anyone passing a family home to a direct descendant gets an additional £175,000 tax free allowance, provided their estate is worth £2 million or less. This allowance decreases by £1 for every £2 that the estate exceeds the £2 million mark.

For more information on IHT, check out our complete IHT guide.  

If you’re interested in how to manage your inheritance tax to ensure the best possible wealth outcomes for you or your family, we can help. Give us a call on 0333 323 9065 or book a free non-committal initial consultation with a member of our team to find out more.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.