Twice the number of UK estates paying inheritance tax on gifts

The number of UK estates paying inheritance tax (IHT) on gifts given within seven years of the individual’s death more than doubled in the decade between 2011-12 and 2020-21, according to data obtained from HMRC via a Freedom of Information request by Saffery LLP.

590 estates paid IHT on gifts in 2011-12, rising to 1,300 in 2020-21 – an increase of 120% – before dropping to 1,080 in 2021-22. The total amount of IHT paid on gifts followed a similar pattern – increasing from £101mn in 2011-12 to £256mn in 2020-21, before decreasing to £221mn in 2021-22.

If an individual lives for seven years after making a gift or transfer it is no longer considered part of their taxable estate – otherwise it can still be liable for IHT at 40%. This includes monetary gifts but also gifts of other assets such as property, household goods like furniture and antiques, and stocks and shares.

There are various IHT exemptions that can be used to give gifts tax-free within the seven-year period, on top of the individual’s nil-rate bands. These include the annual exemption of £3,000, the small gift allowance of £250 per person, and additional tax-free gifts for weddings or civil partnerships.

According to HMRC’s data, a total of £1.85bn in IHT was paid on lifetime gifts by over 10,000 UK estates in the period from 2011-12 to 2021-22. This equates to an average IHT charge on lifetime gifts per qualifying estate of £184,000.

Commenting on the figures, Richard Jameson, partner in the Private Wealth team at Saffery, said:

‘At this festive time of year, many people may be considering gifting assets to loved ones as a way of showing their appreciation and affection, but also in view of the potential benefits it can bring for succession planning and reducing the size of their taxable estate for IHT.

‘These figures from HMRC offer a stark reminder of just how much is at stake if you don’t pay proper heed to the rules around lifetime gifting which can wipe away some of the benefits in terms of IHT on gifts made within the last seven years of life.

‘As with many recent IHT trends there is a fiscal drag factor at play here helping to drive up the number of estates paying IHT on gifts and the average amount of IHT paid. The nil-rate bands and exemptions have been frozen since 2009, meanwhile the value of estates and assets have increased substantially thanks to inflation and wage increases. According to official data on inflation, £325,000 in 2009 is equivalent to £507,000 today, meaning more estates and more gifts will inevitably exceed the thresholds and trigger an IHT charge. This trend is likely to continue for as long as the IHT thresholds remain frozen, which the Chancellor has pledged until at least 2030.

‘Covid-19 will undoubtedly be partly responsible for the peak in 2020-21, given the increase in deaths but also potentially the impact it had on people’s attitudes towards wealth and their family arrangements. More broadly, in this era of rising costs and particularly challenges to getting on the housing ladder, it might be fair to assume the average size of gifts may have increased, as the bank of mum and dad or grandma and grandpa look to help younger generations afford a deposit, pay stamp duty, or cover legal fees.

‘There is a clear call to action in these figures for people to start thinking about succession and transferring assets earlier in their lives to minimise the risk of being caught out by the seven-year rule. Christmas is after all a time for giving, and generosity can also be rewarded by additional tax benefits.’