Inheritance Tax Hits Families Hard on Gifts
27th August 2024
A growing number of families are facing unexpected inheritance tax bills on gifts received from loved ones, according to official figures. This trend is driven by the increasing prevalence of large gifts given to help younger generations onto the property ladder or reduce estates below the £325,000 inheritance tax threshold.
The issue lies in a complex rule stating that any assets transferred within seven years of a person’s death are considered part of their estate for tax purposes. If the total value of the estate, including these gifts, exceeds the nil-rate band, inheritance tax is due. The amount of inheritance tax due on these gifts tapers down over time, as illustrated below:
- 3 to 4 years: 32%
- 4 to 5 years: 24%
- 5 to 6 years: 16%
- 6 to 7 years: 8%
- 7 years +: 0%
Data obtained through a Freedom of Information request revealed that in 2020-21, 1,300 families had to pay inheritance tax on gifts they received, collectively amounting to £256 million. This represents a significant increase from 2011-12, both in the number of families affected and the total tax paid.
Experts attribute this rise to several factors, including soaring asset prices pushing more families over the tax-free allowance and a growing awareness of inheritance tax planning strategies.
The situation is further complicated by rumours that the Labour party may consider raising inheritance tax to address the current budget deficit. This has led to increased anxiety among wealthy individuals about potential tax hikes.
The Treasury has acknowledged the need for difficult decisions on spending, welfare, and tax to stabilize the economy and address the public finances deficit. However, specific measures will be announced in the upcoming Budget.