Published On: Fri, Mar 15th, 2024

Shock Inheritance Tax bills for bereaved who receive gifts from elderly relatives | Personal Finance | Finance

Thousands of wealthy families have faced unexpected Inheritance Tax bills on gifts from loved ones, it has emerged.

In theory individuals can escape some of the impact of the ‘most hated tax’ by giving cash and assets away to loved ones.

However, this tactic will only succeed if this gift is made at least seven years before the donor individual’s death.

New data has discovered that more than 13,000 wealthy families faced surprise tax bills where the individual died within the seven year period.

A Freedom of Information Act request to HM Revenue & Customs found that in the 2020-21 tax year — the latest for which data is available — some 13,380 estates were caught out and some had to pay more than £1million.

Carla Morris, financial planner at wealth manager RBC Brewin Dolphin, which made the FOI request, said: “Inheritance tax is paid by a few but feared by all.

“Many people resent having to pay tax on income that has already been taxed, especially at a time when they are grieving.”

She said an increasing number of people are looking to pass wealth to younger generations during life rather than on death.

She warned that these individuals should start thinking about their estate and financial planning sooner rather than later to ensure the maximum inheritance for beneficiaries.

“Leave it until your 80s, and the risk becomes far greater that you won’t survive the full seven years,” she told the FT.

She highlighted the large amount of tax some failed gifts had attracted.

According to the FOI data, the top 50 failed gifts averaged £3.6million after allowances and exemptions. This would trigger an “eye-watering” bill of up to £1.45million if the death occurred within the first three years.

Inheritance tax is charged at a rate of 40 percent on the value of an individual’s gift above £325,000, if they die within three years.

If the person making the gift dies after three years, the inheritance tax rate falls to 32 percent on the value of the gift above the £325,000 threshold.

This drops to 24 percent for gifts made between four to five years before death; to 16 percent for gifts made between five and six years before death; and falls to eight percent for those who die within six to seven years after the gift.

The average failed gift was worth £156,000 after allowances and exemptions, resulting in a tax bill of £62,400 based on the death occurring in the first three years.

The number of estates faced with an inheritance tax bill has been increasing in recent years, jumping by 17 percent to 27,000 in 2020-21.

Britons owed a record £5.76billion in inheritance tax in 2020-21. This was driven by increased mortality during the pandemic and a freezing of the threshold at which inheritance tax applies. The threshold of £325,000 has not been increased since 2009.

While there had been reports the Government had been considering scrapping inheritance tax or reducing its rate, these failed to materialise in last week’s Budget.

A government spokesperson said: “More than 93 percent of estates are forecast to have zero inheritance tax liability in the coming years — however, the tax is forecast to raise almost £10billion a year by 2028-29 to help fund public services millions of us rely on daily.

“Estates of surviving spouses and civil partners can pass on up to £1million without an inheritance tax liability — significantly more than the average UK house price of £285,000.”

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