Gifting may be a common way to try to reduce your Inheritance Tax bill, but the taxman has enjoyed huge receipts from when they go wrong.
There’s no denying the fact that Inheritance Tax is one of the most unpopular taxes around. Indeed, whenever polls are conducted about our most hated levies, you can bet that Inheritance Tax will be right up there at the top.
And because of that unpopularity, people are often keen to find ways to reduce how much of their estate will find its way into the hands of the taxman after they die.
Because while the principle of Inheritance Tax is pretty simple – if your estate is valued at more than the current threshold, then you’ll pay 40% tax on everything above that level – there is a whole myriad of ways, both legitimate and less so, that people will attempt to make use of in order to reduce their bill.
One good example is the ‘gifting’ allowance.
Give it away, give it away, give it away now
Everybody gets an annual gifting allowance, meaning you can currently give away up to £3,000 a year and the taxman won’t try to take a slice should you pass away suddenly.
On top of that general gifting allowance, you get a host of smaller gifting allowances – you can give £250 each to a number of different people, while if you’re attending a wedding you can hand over upwards of £1,000 as a tax-exempt gift.
You can even make a regular gift to a loved one out of your income, which won’t be subject to the tax, so long as it doesn’t impede on your quality of life.
On top of that, you get potentially exempt transfers. This is where you can give away assets worth up to the Inheritance Tax threshold (which is currently £325,000), without the taxman being able to take any of it.
There is a slight catch though – you need to live for seven years after making the gift. If you pass away sooner than that, the assets will still be liable for Inheritance Tax.
For more, check out our comprehensive guide to how to cut your Inheritance Tax bill.
When gifts go wrong
The trouble is that making use of gifts can be less straightforward than it seems.
According to figures released thanks to a freedom of information request from the Telegraph, in the last tax year estates had to cough up a whopping £111 million worth of additional Inheritance Tax because of gifts gone wrong.
While this figure has been falling in recent years – it came to £128 million in 2017/18 and £133 million the year before – it is nonetheless an enormous sum.
It all comes down to what’s called a ‘gift with reservation of benefit’.
Essentially the issue comes up if you give away an asset, but continue to benefit from it – for example by handing your property to your children but continuing to live in it – then the gift may lose its status as tax exempt.
With these sorts of gift, you need to make some form of ongoing financial payment to reflect the fact that you are benefiting from the asset.
So if you continue to live in the property you have given to your children, you’d need to pay a market rate of rent for example.
Your children would have to pay tax on that income too.
The taxman is watching you
According to tax experts, HMRC is increasingly likely to take a close eye at property that has been gifted away when assessing an estate’s tax liabilities, opening up the question of whether gifting away homes is really an effective move.
It’s worth remembering that inheritance tax is a huge earner for the taxman. Last year the tax brought in receipts of £5.2 billion, a new record high.
And with property prices continuing to rise, albeit at a significantly slower rate over the last couple of years as a result of the ongoing Brexit uncertainty, that tax take is only likely to increase.