Thought you'd escaped inheritance tax? HMRC may take a second bite

Families hoping to reduce inheritance tax by gifting assets during their lifetime must learn the rules or risk being hit with an unexpected bill from HMRC. Passing on wealth early can cut your exposure to inheritance tax (IHT), but only if done by the book. Even well-meaning gifts may still count as part of your estate if they break HMRC's complex rules, triggering a hefty tax charge when you die.

Last year, £61million worth of lifetime gifts were caught out in exactly this way, according to research from law firm TWM Solicitors. HMRC opened 220 investigations in 2023/24 into so-called "gifts with reservation of benefit", where someone appears to have given something away, but still benefits from it.

That might mean giving your home to your children but continuing to live there rent-free, or handing over a holiday property while still spending each summer there.

Even gifting valuable items like antiques or artwork can fall foul of the rules if they remain in use or on display.

HMRC does not recognise these as legitimate gifts. The asset stays within the estate and remains subject to IHT, charged at 40% above the £325,000 nil-rate band, a threshold that has been frozen since 2009. With house prices and asset values rising, more middle-income families are being dragged into the tax net every year.

Many people give away assets to family during their lifetime to reduce the size of their estate, said Gillian Dunlea, managing associate in private client at TWM Solicitors. "However, if HMRC does not accept that an asset has been truly gifted, they will consider it part of the original estate, and it will still be subject to IHT."

She added: "Taxpayers should realise that simply handing over legal ownership of an asset isn't enough to satisfy HMRC."

Even cash gifts can cause issues if they exceed the annual allowance or are made too close to death. Dunlea warned: "This has created enormous fiscal drag where a far greater portion of families' estates are subject to IHT. That makes the sensible gifting of assets even more important."

Whether passing on a business, property or heirlooms, it's vital to understand the rules and consider expert advice.

Jonathan Halberda, specialist financial adviser at Wesleyan Financial Services, urged families not to rush decisions. "We're seeing more people making panicked choices, such as including premature pension withdrawals and hasty property transfers, without understanding the long-term consequences."

He urged early planning to avoid costly mistakes. "You can give up to £3,000 a year tax-free to anyone, or make unlimited gifts to your spouse or civil partner. Regular gifts from surplus income are another option to reduce the size of your estate over time."

Halberda added: "Gifts made within seven years of death may still be taxed, so timing matters."

Other options include using trusts or life insurance to shield assets, and ensuring your will is up to date. "Without a will, your estate follows set rules and may face a bigger tax bill," Halberda said.

Married couples and civil partners can pass everything to each other tax-free. "But those who aren't officially partnered get no automatic break," he added.

Careful planning, done early, remains the best defence against a surprise inheritance tax demand.