Families face shock £2m death tax bills on gifts gone wrong
Thousands of families have been hit with shock tax bills of up to £2m after relatives died less than seven years after making a gift.
In the tax year 2021-22, the latest year for which data is available, there were 12,700 gifts made less than seven years before death, at an average value of £157,000.
This is down from 13,380 failed gifts the year before, when the average value was slightly less, at £156,000, according to data released by HMRC under Freedom of Information rules.
Inheritance tax is paid at 40pc of anything left over a tax-free threshold of £325,000, known as the nil-rate band. But gifts – or 'Partially Exempt Transfers' (PETs) – made more than seven years before death are exempt.
However, if the person who made the gift does not survive a further seven years, their family must pay inheritance tax on the value of the gift on top of the rest of the remaining estate.
Estimates suggest that the total extra tax paid on the failed gifts could be as high as £800m, but some families will have faced bills of millions.
The average value of the top 50 gifts was £5.05m – compared to £3.6m the year before. Tax experts estimated that the largest failed gifts could attract inheritance tax bills as high as £2m.
Daniel Hough, financial planner at wealth manager RBC Brewin Dolphin, said: 'The latest failed PETs stats, which show that inheritance tax receipts are on the increase, seem to indicate that many people are leaving it too late to discuss provisions for others.
'Our advice to clients is that once they have secured their own income requirements, they should l ook at options to pass their wealth to the next generation.'
Spouses can leave their assets to their partner without triggering a tax bill, but parents cannot pass their estate on to their children tax-free. If a home is included in the estate, an extra £175,000 is given as a ' residence nil-rate band '.
It comes ahead of a Labour inheritance tax raid on pensions. Chancellor Rachel Reeves announced at her inaugural Budget last October that from April 2027, leftover pension wealth would be included in an estate for inheritance tax purposes.
Mr Hough said that the changes could mean that parents gave away money earlier, reducing the number of failed gifts.
He said: 'In terms of the future direction of inheritance tax receipts, although difficult to guess, we could potentially see a reduction from 2025 onwards due to the inclusion of pensions for inheritance tax from April 2027, as more people seek financial advice earlier with their estate planning.'
Mike Hodges, partner at tax firm Saffery, said: 'The latest HMRC figures on failed PETs are really quite startling.
'My sense is that with the inheritance tax nil-rate band now frozen until 2030, at which point it will be celebrating its 21 st birthday at this level, people are increasingly looking at what else they can do, and one option is to make lifetime gifts.'
A Treasury spokesman said: 'More than 90pc of estates are forecast to have zero inheritance tax liability in the coming years and people can pass on up to £1m without being liable.
'The tax is forecast to raise more than £14bn a year by 2030, money that will help to fix our public services as part of our Plan for Change.'
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