Some of the richest families in Britain lose Pound 3 million each when they wait too long to give inheritances

According to recent data, a poorly understood gift-giving regulation is causing even ordinary Brits to receive enormous and unanticipated inheritance tax bills

According to new estimates, some of the richest families in Britain received retrospective inheritance tax demands totaling about £3 million because their loved ones took too long to donate money and other assets.

The families attempted to utilize the "potentially exempt transfer" (PET) rules, but they did not live long enough to do so, which led to the bills.

PETs enable people to make unlimited-value gifts that, under the seven-year rule, are free from inheritance tax if the giver lives for an additional seven years.

However, according to a Freedom of Information (FOI) request from wealth manager RBC Brewin Dolphin, HMRC's administrative systems recorded 14,030 failed gifts where inheritance tax became due because the giver tragically passed away within the seven years.

After allowances and exemptions, the average amount of the top 25 unsuccessful gifts in the 2022 - 2023 tax year was 7.93 million per family estate.

If the PET failed within the first three years, a gift of this magnitude would result in a tax bill of up to £3.17 million, which would mean that 40% of the IHT was due. As more time elapsed since the gift was given, the bill would decrease until seven years later, at which point inheritance tax would be waived as long as the giver was still living.

According to an analysis of the FOI, the average failed gift was 171,000 per family estate after allowances and exemptions. If the PET failed within the first three years, a recipient who paid 40 percent inheritance tax on that amount would have to pay 68,400.

The director of financial planning at wealth management RBC Brewin Dolphin, Michelle Holgate, stated: "If the donor passes away within the seven years, the recipient is responsible for paying inheritance tax on the amount over the available 325,000 tax-free threshold, on a sliding scale of eight to forty percent, depending on the amount of time that has passed between the donation being made and the donor passing.

"Those who are already grieving the loss of a loved one may be extremely shocked by this news. For this reason, we advise clients to make plans well in advance or think about purchasing insurance that will cover these costs. The "

Source FOI to HMRC: The numbers include allowances and exemptions.

Bills from IHT will double.

The Office for Budget Responsibility (OBR) projects that inheritance tax revenues to the Treasury will nearly double over the next five years to 14.3 billion.

For estates valued at more than £325,000, IHT is currently assessed at 40%. If the estate is passed to direct descendants, an additional £175,000 is allowed toward a primary residence.

The allowance can be shared by married couples or civil partnerships, allowing them to transfer £1 million to their offspring tax-free. Transferable allowances do not apply to cohabiting couples.

However, there are strategies, such as using trusts, to lower your IHT bill.

IHT mitigation through trusts.

Families can avoid unexpected inheritance tax bills brought on by the seven-year rule by transferring gifts into trust.

Because trusts enable donors to indirectly distribute assets, they may be appealing. A trustee is a third party who typically holds and oversees a trust.

With the parents acting as trustees, grandparents frequently set aside money for their grandchildren. When the grandchildren are old enough to make responsible financial decisions, money is usually released. There is no requirement to wait until the child turns 18 or 21; this is at the trustees' discretion.

"Trusts can be used to ringfence funds in a tax-efficient way for inheritance," stated Holgate. A "

Gift inter vivos insurance policies, which pay out if the donor does not survive the seven years and a tax demand arrives at your door to cover the bill, are another option worth thinking about.

"These policies have a seven-year term and should be placed in a trust, as you would expect. Otherwise, the benefits from a claim on the policy may be added to the individual's estate, increasing the tax liability," stated Holgate. A "

"If you want to plan your gifts in the most tax-efficient way possible, the earlier you sit down with a financial planner, the better," she continued.

"The longer you put off giving, the more likely it is that you won't live the full seven years, as the numbers in our study show. The "