Hundreds of families are subject to the seven-year inheritance tax rule because gifts lead to unexpected bills

An increasing number of families are being unexpectedly hit with inheritance tax (IHT) bills on gifts as more and more people fail to adhere to the complex seven-year rule, recent figures show.

The rule states that any assets transferred within seven years of a person’s death will be treated as part of their estate for tax purposes, subject to a 40% tax on amounts exceeding the £325,000 threshold.

Data obtained through a Freedom of Information request shows that in the 2020-2021 tax year, 1,300 families had to pay inheritance tax on gifts, more than doubling the number of families affected in 2011-2012. These figures reflect the growing trend of parents and grandparents giving away significant amounts of money to help their children get on the wealth ladder or to reduce the size of their estate. However, as real estate prices and other assets soar, many of these donations exceed their tax-free allowance.

Collectively, these 1,300 families paid £256 million in inheritance tax on large gifts, a significant increase on the £101 million paid in 2011-12. The spike in these tax bills, which have risen by 119% in real terms, highlights the financial pressure on families who years earlier may not have anticipated paying such high taxes on gifts they received.

Ian Dyall of Evelyn Partners, the wealth management firm that analyzed the data, pointed out that many families may not have the liquid assets needed to pay these unexpected bills, especially if the donations were invested in illiquid assets such as real estate. He also noted that while some families are increasingly aware of the potential tax benefits of making large lifetime gifts, the strategy can backfire if the donor does not survive the seven-year period required to escape tax liability .

Amid these growing concerns, there are rumors that Labor is considering raising inheritance tax to address a significant hole in the public finances, prompting wealthy savers to take pre-emptive action. Lawyers have reported an increase in clients concerned about potential changes, with many choosing to make substantial donations now, before new tax measures are introduced.

James Ward of Kingsley Napley highlighted that clients with assets between £2 million and £5 million are particularly concerned about the loss of existing tax exemptions, such as the nil interest band or the residential nil interest band, and are seeking advice on how to limit the tax exemption. the impact of possible tax increases.

Acknowledging the challenges ahead, a Treasury spokesman said difficult decisions on spending, welfare and taxation will be made in the upcoming Budget to tackle the £22 billion deficit in the public finances. The possibility of further tax changes remains on the table as the government tries to stabilize the economy.