The number of families hit with inheritance tax bills over gifts has more than doubled over the past decade.
People can avoid paying inheritance tax (IHT) when cash and assets are passed on to family members at least seven years before their death.
However HMRC is recovering hundreds of millions of pounds through the “death tax” every year on gifts that do not comply with the seven-year rule.
The number of estates paying IHT on gifts doubled from 590 in 2011-12 to 1,300 in 2020-21, according to data obtained by the wealth manager Evelyn Partners using a Freedom of Information request.
The value of IHT collected on gifts also more than doubled, rising from £101 million in 2011-12 to £256 million in 2020-21.
The Chancellor Rachel Reeves is understood to be planning major changes to what has been described as Britain’s most hated tax in her October budget in order to bring in billions of pounds of extra tax income from the bereaved.
As a result, tax experts have reported a surge in demand from people looking for ways to protect their wealth and the inheritance they can pass on.
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
Ian Dyall from Evelyn Partners said: “More families are making gifts in their lifetime in an effort to reduce the size of their estate as more estates become liable to IHT, and it is a growing burden.
“In some cases the donor just doesn’t live long enough for the estate to reap the full tax benefit. But in other cases there is a lack of awareness, or a misunderstanding of the rules around gifting.”
Currently, inheritance is only paid by about 4 percent of estates. Despite this, the government raked in a record £7.5 billion in IHT in 2023-24.
About £2.8 billion IHT was paid between April and July, up £200 million from the same period a year ago.
Inheritance tax is typically charged at 40 per cent on estates valued over the £325,000 threshold. 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.
Anything left to a spouse or civil partner is exempt from tax, and a partner’s allowances can also be inherited, meaning couples can pass on up to £1 million tax-free.
Gifts made in the three years before death can be taxed at 40 percent and those given between three and seven years before death are taxed on a sliding scale, starting at 32 percent and falling to 8 per cent. Gifts given more than seven years before death are tax-free.
Mr Dyall said: “It can be quite tricky to make lifetime gifts that are completely safe from IHT and suddenly having to settle a surprise 40 percent tax bill on a large sum will be a challenge for many people.
“Anyone receiving a big gift from an elderly relative might want to assess the tax situation before they either spend it all or plough it into something illiquid like a property.”
Nimesh Shah from the accountancy firm Blick Rothenberg told the Sundat Times that people are often caught out because they left it too late to make gifts.
“No one wants to think about death and taxes, so they put it off. But as you get older it is obviously less likely you will survive the full seven years, so it’s important to plan early. There is also a common misconception that if you give away an asset you are free of IHT,” he said.
A Treasury spokesman said: “Following the spending audit, the Chancellor has been clear that difficult decisions lie ahead on spending, welfare and tax to fix the foundations of our economy and address the £22bn hole in the public finances left by the last government. Decisions on how to do that will be taken at the Budget in the round.”
