From MoneyWeek · · 2m
Families lose £1 billion to inheritance tax on late gifts
Over 5,000 estates paid tax on gifts made too close to death, with the seven-year rule catching many families out.
In brief
Over 5,000 estates paid tax on gifts made too close to death, with the seven-year rule catching many families out. Start gifting early. If you die within seven years of making a gift, your loved ones may face a hefty inheritance tax bill. Originally reported by MoneyWeek.
£1 billion tax bill on gifts
Over 5,000 estates paid more than £1 billion in inheritance tax on lifetime gifts between 2020/21 and 2023/24. In 2023/24 alone, 1,390 estates paid £315 million.
Average bill hits £226,000
Estates that paid inheritance tax on late gifts in 2023/24 faced an average bill of £226,000. The figures come from HMRC data obtained by NFU Mutual.
The seven year rule explained
You can give away any amount tax-free if you survive seven years after making the gift. Die within seven years and the gift may be liable for inheritance tax.
Pension changes drive gifting surge
Families are increasingly gifting money to reduce inheritance tax exposure. The trend will likely accelerate as unused pension pots become part of estates from April 2027.
Start planning earlier than you think
Many people start thinking about inheritance tax planning later in life, leaving less time for the seven-year clock to run.
“Many people start thinking about inheritance tax planning later in life, leaving less time for the seven-year clock to run.”
How taper relief works
If you die three to seven years after making a gift, the tax rate slides down from 32% to 8%. Gifts made over seven years before death are completely tax-free.
Gifts eat your allowance first
Gifts made within seven years before death use up your £325,000 tax-free allowance first. Any amount above that gets taxed on the sliding scale.
Annual exemption of £3,000
You can give away up to £3,000 each tax year to one or more people. If you didn't use it last year, you can carry it forward and gift £6,000 immediately.
Wedding gifts get special treatment
Parents can gift £5,000 to a child getting married, grandparents can give £2,500, and anyone else can give £1,000. This can be combined with other allowances.
Surplus income gifts have no limit
You can gift unlimited amounts from surplus income without inheritance tax. The gifts must be regular, funded from income not capital, and not reduce your standard of living.
“For retirees who receive more pension, rental or investment income than they actually spend, this can be one of the most effective ways.”
Keep proper records of gifts
The challenge with surplus income gifting is ensuring gifts are properly documented and adequate records are retained. Without proof, HMRC may reject the claim.
At a glance
Start gifting early. If you die within seven years of making a gift, your loved ones may face a hefty inheritance tax bill.
