Due to an error, 220 families were left with shock bills; be wary of inheritance tax gifting rules

Families can give away assets during their lifetime to reduce inheritance tax liabilities, but failing to meet gifting rules could trigger unexpected inheritance tax billsInheritance tax (IHT) liabilities can be avoided through gifting, but last year, 61 million gifts were given in violation of HMRC's regulations, forcing families to pay for gifts they believed would be exempt from IHT

After TWM Solicitors, a private wealth and family law firm, analyzed the inheritance tax data from the tax office, HMRC looked into and discovered problems with 220 Gifts with Reservation of Benefit in 2023 - 2024.

These are gifts in which the asset's original owner gifts it to someone else while still using or benefiting from it. Giving a child a property while continuing to reside there is one example.

HMRC does not view a gift as legitimate if the giver takes advantage of the asset going forward, and families may receive an unexpected inheritance tax bill.

In order to lower the size of their estate and, consequently, the IHT bill upon their death, many people donate assets to family members while they are still alive, according to Gillian Dunlea, managing associate in private client at TWM Solicitors.

HMRC will treat an asset as belonging to the original estate and subject to inheritance tax if they do not believe it has been genuinely gifted.

Gifts given within seven years of the death date will be included in the executors' calculation of the deceased's IHT liability. If this is not done correctly, the executor may be held personally liable for unreported and unpaid taxes.

More people's estates will be subject to an inheritance bill upon their death thanks to the April 2027 implementation of bringing unused pension savings under the inheritance tax net. This could result in a much higher tax bill for surviving family members.

Ways to avoid inheritance tax and IHT myths are covered in separate articles.

Typical errors in inheritance tax gifting regulations.

Your estate could be caught off guard by the Gifts with Reservation of Benefit regulations in a number of situations.

One typical example is when parents give the family home as a gift while still living there for free. It will still be regarded by HMRC as part of your estate unless you pay full market rent and fulfill other requirements.

It's also not a good idea to pass on a vacation house in the UK while still using it each summer, unless you want to leave your loved ones with an inheritance tax bill.

It would also be against the rules to give someone a vintage wine collection or a fancy car while keeping them in your garage. A gift is considered part of your estate and could be liable to IHT if you are still receiving benefits from it.

Under the gifting regulations of HMRC, it is also prohibited to give valuable artwork to adult children while maintaining the artwork on display at home. Continued display at the gifter's residence may eventually result in IHT, even if the item is lawfully owned by someone else.

HMRC views it as not really giving away shares in a family business, even though some people might think about doing so while keeping control over dividends or voting rights. The fact that HMRC will begin charging IHT on family businesses in April 2026 could make this a serious problem.

Dunlea stated: "A lot of people believe that in order to lower their inheritance tax liability, they must make gifts. Though many of them are making mistakes, it is currently one of the easiest ways to lower an IHT bill.

"Taxpayers should understand that HMRC is not satisfied with merely transferring legal ownership of an asset.

Giving in order to evade inheritance tax.

Lawyers say it's hard to give a list of things people should do to make sure they're giving gifts correctly because it's a complicated topic and the law doesn't even define what a gift is.

"A Gift with Reservation of Benefit, however, could cover a very wide range of scenarios," stated Dunlea of TWM Solicitors.

This includes holding onto physical possession of a personal item, continuing to live in a property, or receiving income from an investment.

Dunlea stated, "For a gift to be effective for tax purposes, the giver would have to ensure that they no longer receive any benefit at all."

Regarding the property being gifted and the intentions behind it, it is crucial to be explicit. Generally speaking, a genuine gift has no conditions and no property benefit is retained.

When a property is gifted, for instance, with the intention of continuing to live there or using it informally, this will violate HMRC's gifting regulations, which could result in an inheritance tax bill. For example, a formal commercial rental agreement, payment of commercial rent for the use (or full consideration with other assets), and periodic reviews are all possible arrangements, Dunlea said. Advice should be sought or the HMRC IHT technical team should be consulted if a high-value asset is to be given as a gift.

"Whether it's a business, vacation home, or valuable items like artwork and cars, it's crucial to understand the rules around gifting," Dunlea stated. Before giving gifts, get professional legal advice to help you avoid expensive blunders and shield your loved ones from unexpected tax bills.

How gifts are exempt from inheritance taxes.

According to wealth managers St Jamess Place, Gift Inter Vivos (GIV) insurance, a specialized type of life insurance, is one method of avoiding inheritance tax on gifts that is growing in popularity.

Its purpose is to assist people in shielding their loved ones from a possible IHT obligation on funds or property offered to them while they are still alive.

"When a large gift has been given and the recipient might not have the money to pay the IHT if the donor dies within seven years, a GIV policy is usually appropriate," Tony Mdd from St. The Jamess Place.

With the amount of coverage decreasing over the policy's term to correspond with the declining IHT liability as a result of taper relief, the policy is written on the life of the person making the gift.

If the giver lives for three years following the gift, taper relief lowers the inheritance tax due. It operates on a sliding scale from years three to seven, with the tax rate reducing as time passes. There is no inheritance tax owed after seven years.

GIV insurance policies usually have a seven-year duration, which is similar to the IHT taper period. However, short terms may be applied to gifts that were given earlier within that time frame.

"As GIV cover becomes a more popular estate planning tool, we've seen website views among financial advisers double compared with the same period last year," Mdd said.

The best advice for lowering the IHT burden when removing Gift Inter Vivos cover.

1) Be sure to use a trust.

For GIV policies to avoid becoming part of the estate and being subject to inheritance tax, they must be written into trust. Your policy's proceeds will be paid to your beneficiaries directly rather than your estate because it is written in trust, avoiding IHT.

2) Make sure your policy is for seven years.

Typically, your policy should last seven years because no inheritance tax is owed after seven years from the date of the gift. Nothing, however, prevents you from implementing a six-year policy for a gift that was given a year ago.

3) The price of GIV insurance will differ.

This depends on a number of variables, including the person's age, health, and the value of the gift to be insured, so be sure you understand how much you must pay. St James's Place estimates that a 65-year-old man in good health would pay about £6 per month for a seven-year level term policy with a sum assured of £10,000.

4) Different rules for different presents.

Separate policies might be required for multiple lifetime gifts in order to align the timing and value of each gift.

5) Review the policy and maintain accurate records.

Keep thorough records of the gift, the policy's existence, and the trust. Above all, keep a record of the premiums paid because, even though they are considered yearly gifts, they should be exempt from taxes that executors can only claim upon the donor's passing.