Britons who have gifted money to family members in the past seven years have been warned they could face an inheritance tax charge.
The tax office is on track for a record year, with inheritance tax receipts hitting £6.3 billion in the eight months from April to December 2024.
This marks a £0.6 billion increase compared to the same period the year before, putting receipts on track to beat HM Revenue and Customs (HMRC) record £7.5 billion.
Jonathan Halberda, specialist financial adviser at Wesleyan Financial Services, said: “Given that the inheritance tax threshold has been frozen until 2030, it’s almost inevitable that IHT receipts will continue to rise every month.”
Under current inheritance tax (IHT) rules, estates valued above £325,000 are typically taxed at 40%. This is referred to as the “nil-rate” threshold, and it has been frozen since 2009 despite soaring house prices and inflation.
During her maiden Budget last autumn, Chancellor Rachel Reeves announced an extension to the freeze on IHT thresholds for two more years until 2030.
One way to reduce the tax burden is to gift your wealth. However, there are strict guidelines, and timing is important.
Mr Halberda said: “In general, every year you are allowed to give gifts of any value to a spouse or partner, or gifts of up to £3,000 to anyone else.”
Small monetary gifts can also be given to any number of people in a single year, provided each gift does not exceed £250.
Mr Halberda continued: “You can also make regular payments out of your income, which can help stop the value of your estate exceeding the £325,000 tax-free allowance.”
However, he warned: “But there are limits. Gifts given less than seven years before you die can be taxed, depending on the gift’s value and your relationship to the recipient.”
If you survive more than seven years from the point the gift is given, the recipient should not be liable for inheritance tax unless the gift is part of a trust.
How much inheritance tax is charged on gifts?
If you die within seven years of giving a gift and there’s inheritance tax to pay on it, the amount of tax due after your death depends on when you gave it.
A statement on the Government website reads: “Gifts given in the three years before your death are taxed at 40%. Gifts given three to seven years before your death are taxed on a sliding scale known as ‘taper relief’.”
However, it noted: “Taper relief only applies if the total value of gifts made in the seven years before you die is over the £325,000 tax-free threshold.”
If taper relief applies, the gift would be taxed at the following rates:
- If the person dies within three years of giving the gift – 40 percent
- If the person dies within three to four years – 32 percent
- If the person dies within four to five years – 24 percent
- If the person dies within five to six years – 16 percent
- If the person dies within six to seven years – 8 percent
- If the person dies after more than seven years – 0 percent.
