Leaving it too late to gift inheritances costs some of Britain’s wealthiest families £3m each

Some of Britain’s wealthiest families have been sent retrospective inheritance tax demands of around £3 million, according to new estimates, because their loved ones waited too long to give away cash and other assets.

The bills arose because the families tried to take advantage of the “potentially exempt transfer” (PET) rules but didn’t survive long enough to use them properly.

PETs allow individuals to make gifts of unlimited value which become exempt from inheritance tax if the giver survives a further seven years, known as the seven year rule.

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But HMRC’s admin systems captured 14,030 ‘failed gifts’ – where inheritance tax became due as a result of the giver sadly dying within the seven years – a Freedom of Information (FOI) request from wealth manager RBC Brewin Dolphin has revealed.

The top 25 failed gifts in the 2022/23 tax year averaged £7.93 million per family estate after allowances and exemptions.

A gift of this size would trigger a tax bill of up to £3.17 million if the PET failed in the first three years, meaning 40% IHT was due. The bill would be less the more time passed since the gift was given, until, once seven years passed, and providing the giver was still alive, inheritance tax would be avoided.

The average failed gift stood at £171,000 per family estate after allowances and exemptions, according to analysis of the FOI, meaning a recipient paying 40% inheritance tax on that sum faced a bill of £68,400 if the PET failed in the first three years.

Michelle Holgate, director of financial planning at wealth manager RBC Brewin Dolphin, said: “If the donor dies within the seven years, then inheritance tax, on the amount in excess of the available £325,000 tax-free threshold, is payable by the recipient, on a sliding scale of eight to 40% depending on the time that has passed between the gift being made and the donor passing.

“This news can come as a massive shock to people who are already mourning the loss of a loved one. That’s why we would urge clients to plan well ahead of time or consider insurance policies which meet these bills.”

Looming changes to IHT on pensions and family businesses

Tax changes announced by chancellor Rachel Reeves in her 2024 Budget are fueling interest in gifting as families look to avoid inheritance tax and pass something on to the next generation, according to RBC Brewin Dolphin.

Under the current rules, retirees are still able to pass on unspent pension pots without their descendants incurring inheritance tax. But that will change from April 2027 when unused pension pots will come into the IHT net. Many people are grappling with whether to convert their 25% tax-free lump sum into a gift, the wealth manager said.

In addition, the chancellor last year announced proposed changes to agricultural property relief (APR) and business property relief (BPR), which historically meant no inheritance tax was due on most farmland, property and business assets in agricultural estates.

The initial proposals limit the 100% APR and BPR relief to the first £1 million of combined agricultural and business property. From April 2026, property above that value will benefit from 50% relief, leaving an effective IHT charge of 20% on the value of the APR/BPR above the first £1 million.

Holgate said: “Strategic gifting was once seen as a tactic of the super affluent, but has now gone mainstream.

“We’re seeing enquiries in particular from farmers looking to pass on assets such as land to the next generation without triggering a big IHT bill.

“People are naturally protective of family businesses which in some cases have been built up over several generations. They want to keep these businesses in the family and see them thrive long into the future.”

Source FOI to HMRC: Figures are after allowances and exemptions

IHT bills to double

Inheritance tax receipts to the Treasury are predicted to almost double over the next five years to £14.3 billion, according to the Office for Budget Responsibility (OBR).

IHT is currently charged at 40% for estates worth more than £325,000 with an extra £175,000 allowance towards a main residence if it is passed to direct descendants.

Married couples or civil partnerships can share their allowance, meaning they can pass on £1 million to their children without any tax. Co-habiting couples do not benefit from transferable allowances.

But there are ways to reduce your IHT bill, including by using trusts.

Using trusts to mitigate IHT

Making gifts into trust can help families avoid surprise inheritance tax bills triggered by the seven-year rule.

Trusts can be attractive as they allow donors to give away assets indirectly. Typically, a trust is held and managed by a third party known as a trustee.

Often, grandparents will set aside money for grandchildren with the parents as trustees. Money is typically released when the grandchildren are mature enough to make prudent financial decisions. This is at the discretion of the trustees and there is no obligation to wait until the child turns 18 or 21.

Holgate said: “Trusts can be used to ringfence funds in a way that is tax efficient for inheritance.”

Another option worth considering is gift inter vivos insurance policies which pay out if the donor doesn’t survive the seven years and a tax demand lands on your doorstep, to cover the bill.

Holgate said: “As you would expect, these policies have a seven-year term and should be placed in a trust, otherwise the benefits from a claim on the policy may be added to the individual’s estate, thereby increasing the tax liability.”

She added: “The earlier you sit down with a financial planner, the better if you want to plan your gifting in the most tax efficient manner.

“As the figures in our research demonstrate, the longer you delay your gifting, the greater the risk you won’t survive the full seven years.”