New figures obtained by financial advice firm NFU Mutual found more than 5,000 estates paid in excess of £1 billion in inheritance tax (IHT) on lifetime gifts in the tax years 2020- 2024.
Families are increasingly gifting money or assets to loved ones to reduce their inheritance tax exposure, a trend that is likely to accelerate with the inclusion of pensions in the IHT net from April 2027.
However, leaving gifts too late and not surviving seven years can have serious consequences. Non-exempt gifts made during an individual’s lifetime are not subject to IHT if the person making the gift lives for seven years afterwards. However, if they die within seven years the gift is included in the IHT calculation.
A freedom of information (FoI) request made by NFU Mutual to HM Revenue & Customs shows 5,080 estates paid IHT on gifts between 2020 and 2024 after the individual died within seven years of the gift being paid.
In the financial year 2023-24, a total of £315 million was paid by 1,390 estates – an average of £226,000 per estate.
Sean McCann, chartered financial planner at NFU Mutual, analysed the figures. He explained: “Making gifts can be a very effective way of reducing your potential inheritance tax liability. With pensions set to be caught in the tax net from April 2027, it’s likely we’ll see more families making gifts to mitigate the impact.
“There is a widely held misconception that if you make a gift and survive at least three but less than seven years, the inheritance tax due on the gift reduces on a sliding scale. However, what happens in practice is that any gifts made in the seven years before death ‘eat’ your £325,000 tax free allowance first, with the tapering of the tax only applying to any part above £325,000.”
He added: “Inheritance tax is one of the most feared and least understood taxes. It’s possible we could see changes in the gifting rules in October’s budget, with restrictions on some of the exempt gifts including ‘gifts from normal expenditure’ which allows you to give away unlimited regular gifts from income immediately exempt from inheritance tax provided it leaves you with sufficient income to maintain your standard of living.
‘’This exemption is often used to fund grandchildren’s school fees or channel regular income into pensions or other investments held in trust for younger generations of the family. The unlimited nature of this exemption favours those with high incomes, which may make it an attractive target for the chancellor.’’
