Inheritance Tax Blunder Catches Hundreds of Grieving Families

‘Gift with Reservation’ Rules Spark Unexpected Tax Bills

Hundreds of families are facing unexpected inheritance tax demands due to a common pitfall when gifting assets. HMRC data reveals 220 estates were billed £61 million on gifts improperly transferred, highlighting a critical misunderstanding of gifting regulations.

The Peril of Retained Benefits

A significant number of people are inadvertently falling foul of the “Gift with Reservation of Benefit” rules. This occurs when individuals gift assets, such as property or valuable collections, but continue to retain some level of use or benefit from them. Tax authorities consider these gifts as still part of the original estate.

For instance, gifting a family home to a child while continuing to reside there is permissible only if market-rate rent is paid. Failure to do so means the gift is legally viewed as never having been made, leading to it being taxed as part of the estate upon death. Similarly, gifting a classic car but keeping it in your garage, or using a gifted holiday home without paying rent, can trigger these tax implications.

Expert Warning on Gifting Pitfalls

Duncan Mitchell-Innes, a partner at TWM Solicitors, commented on the situation: Making gifts is now one of the simplest ways of reducing an IHT bill, however many people are making mistakes in the process. Taxpayers should realise that simply handing over legal ownership of an asset isn’t enough to satisfy HMRC.

Rising Tax Burden and Future Projections

The total inheritance tax paid by individuals reached a record £8.5 billion in the 2024-25 tax year, with an additional £1.5 billion collected in the first two months of the current tax year alone. Currently, around 5% of estates are subject to inheritance tax, but this figure is projected to rise.

As tax thresholds remain frozen, inflation is steadily increasing the value of assets like investments and property. Experts predict that by 2027, this trend, coupled with the inclusion of pensions within the inheritance tax net, could see the proportion of taxable estates climb to 8%.

Proactive Measures for Inheritance Planning

Kirsty Stone, a chartered financial planner at The Private Office, noted a significant increase in inquiries regarding inheritance tax and gifting strategies following the announcement of pension reforms. A lot of people might think that giving away their home seems like a quick fix, without realising the intricacies of the rules.

Shane van Rossum, a retired school registrar, has altered her plans to pass on her pension. Concerned about future tax liabilities, she has begun withdrawing regular amounts from her pension pot to reduce its overall value. I feel that I’ve worked hard to save money and I don’t want it all taken away, she stated. I’m not trying to avoid inheritance tax, but I want to be savvy about what I do.

Ms. van Rossum emphasizes the importance of thorough research and meticulous record-keeping for any gifts made. If you want to leave money you need to be really sure about what you’re doing, and do your best to ensure that your family will get the best benefit from it, she advised.

Financial experts recommend that gifts made from surplus income are acceptable for inheritance tax purposes, provided they are regular and clearly documented as originating from income, not capital assets. The annual tax-free gifting allowance of £3,000 remains a key tool for reducing potential inheritance tax liabilities.