Gifting is a popular way to avoid inheritance tax (IHT) liabilities – but £61 million in gifts given broke HMRC’s rules last year, with families forced to pay up on presents they thought would be free from IHT.
HMRC investigated and found issues with 220 ‘Gifts with Reservation of Benefit’ in 2023/24, according to analysis of the tax office’s inheritance tax data by TWM Solicitors, a private wealth and family law firm.
These are ’gifts’ where the original owner makes a gift of an asset to another person but continues using or enjoying a benefit from the asset. For example, gifting a property to a child, but still living in it.
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If the person giving the gift continues to benefit from the asset, HMRC does not consider it a proper gift, and there will potentially be an unexpected inheritance tax bill for families.
Gillian Dunlea, managing associate in private client at TWM Solicitors, said: “Many individuals give away assets to family during their lifetime to reduce the size of their estate, and therefore reduce the IHT bill when they die.
“However, if HMRC does not accept that an asset has been truly gifted, they will consider it part of the original estate, and it will be subject to inheritance tax.”
It is the responsibility of the deceased’s executors to calculate any IHT liability, which will include any gifts made within seven years of death. Failure to do so correctly could result in the executor having personal liability for tax not declared and paid.
With unused pension savings due to be brought inside the inheritance tax net from April 2027, more people’s estates are set to be subject to an inheritance bill on their death, potentially leaving loved ones with a significantly higher tax bill.
In separate articles we look at ways to avoid inheritance tax and IHT myths.
Common mistakes with inheritance tax gifting rules
There are a number of scenarios that may leave your estate caught out by the Gifts with Reservation of Benefit rules.
A common one is parents gifting the family home but continuing to live in it rent-free. Unless you pay full market rent and meet other conditions, HMRC will still consider it as part of your estate.
Passing on a holiday home in the UK, but continuing to use it every summer, is another no-no unless you want to leave your loved ones an inheritance tax bill.
Gifting a luxury car or vintage wine collection but keeping them in your garage would also fall foul of the rules. If you're still benefiting from the asset, the gift is part of your estate and may be subject to IHT.
Giving valuable artwork to adult children but keeping the art on display at home is also not allowed under HMRC’s gifting rules. Even if the item is legally owned by someone else, continued display at the gifter’s home could ultimately trigger IHT.
Some may consider transferring shares in a family business but retaining control over dividends or voting rights, but HMRC sees this as not truly giving the shares away. This could become a major issue as HMRC will start to charge IHT on family businesses from April 2026.
Dunlea said: “Many individuals feel they need to make gifts to reduce their inheritance tax bill. It is now one of the simplest ways of reducing an IHT bill, however many of them are making mistakes in the process.
“Taxpayers should realise that simply handing over legal ownership of an asset isn’t enough to satisfy HMRC.”
Gifting to avoid inheritance tax
It’s difficult to provide a checklist of steps people should take to ensure they are gifting correctly, according to lawyers, as it is a complex area and there is not even a definition of a gift in the legislation.
“However, a Gift with Reservation of Benefit could cover a very wide range of scenarios,” said TWM Solicitors’ Dunlea.
This includes continuing to receive the income from an investment, still living in a property, or keeping physical possession of a personal item.
“Someone wanting to make a gift would need to make sure they no longer receive any benefit at all for it to be effective for tax purposes,” Dunlea said.
It is important to be clear in terms of the property being gifted and what the intentions are. A true gift does not normally have strings attached or any benefit retained in the property.
So if there is an arrangement, when a property is gifted, for example, to continue to live there or have use of it informally, that will fall foul of HMRC’s gifting rules – meaning an inheritance tax bill could be due.
Arrangements can be put in place such as having a formal commercial rental agreement, paying commercial rent for the use (or full consideration with other assets) and ensuring this is reviewed periodically, said Dunlea.
If an asset is high value and a gift is intended, advice should be sought and or it should be referred to the IHT technical team at HMRC.
Dunlea said: “Whether it’s a business, holiday home, or valuable items, like artwork and cars, it’s crucial to understand the rules around gifting. Seeking expert legal advice before making gifts can help avoid costly mistakes and protect your loved ones from surprise tax bills.”
How to avoid inheritance tax on gifts
One way of avoiding inheritance tax on gifts that is becoming increasingly popular, according to wealth managers St James’s Place, is Gift Inter Vivos (GIV) insurance – a specialist form of life cover.
It is designed to help individuals protect their loved ones from a potential IHT liability on money or assets gifted during their lifetime.
“A GIV policy is typically suitable where a substantial financial gift has been made and the recipient may not have the funds to pay the IHT if the donor passes away within seven years,” said Tony Müdd from St. James’s Place.
The policy is written on the life of the person making the gift, with the amount of cover reducing over the term of the policy to match the reducing IHT liability due to taper relief.
Taper relief reduces the inheritance tax owed if the person making the gift survives three years after the gift was made. It operates on a sliding scale from years three to seven, with the tax rate reducing as time passes. After seven years, no inheritance tax is due.
GIV insurance policies typically last for seven years, mirroring the IHT taper period although short terms can be used in respect of gifts given previously within a seven-year period.
“We’ve seen website views for GIV cover double among financial advisers compared with the same period last year, as it becomes a more widely used estate planning tool,” said Müdd.
Top tips when taking out Gift Inter Vivos cover to reduce IHT burden:
1) Make sure to use a trust
GIV policies must be written into trust, otherwise the proceeds could become part of the estate and be subject to inheritance tax. By being written in trust, the proceeds of your policy will be paid directly to your beneficiaries rather than your estate, avoiding IHT.
2) Ensure you have a seven-year policy
Your policy should normally be for seven years as no inheritance tax is due after seven years from the date a gift was made. However, there is nothing to stop you doing a six-year policy for a gift made a year ago.
3) Cost of GIV cover will vary
This is depending on a range of factors, from an individual’s age, health, and the value of the gift to be insured so make sure you’re clear on what you are required to pay. A ballpark figure, according to St James's Place, would be £6 per month per £10,000 sum assured for a seven-year level term policy for a 65-year-old male in good health.
4) Multiple policies for multiple gifts
For multiple lifetime gifts, separate policies may be needed to match each gift's timing and value.
5) Keep clear records and review the policy
Remember to keep clear records of the gift, the existence of the policy and trust. Most of all, keep a record of premiums paid as although these are treated as annual gifts, they should fall within an exemption that can only be claimed by executors on the donor’s death.
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