More than 14,000 UK households have been issued unexpected tax bills after falling foul of the seven-year gifting rule, according to new HMRC figures. The data shows that 14,030 gifts were subject to inheritance tax during the 2022/23 financial year, with some families facing bills exceeding £3 million.
The seven-year rule means that gifts given during a person's lifetime are exempt from inheritance tax only if the donor survives for at least seven years after making the gift. If death occurs between three and seven years later, charges apply on a sliding scale from 8% to 32%, while gifts made within three years of death are taxed at the full 40% rate.
The average value of failed gifts stood at £171,000 after allowances and exemptions, which would generate a bill of £68,400 if the donor died within three years. The 25 largest failed gifts were worth an average of £7.9 million each, with the biggest tax bills reaching £3.1 million per family.
Michelle Holgate, from investment firm RBC Brewin Dolphin, which submitted the freedom of information request, said: "Strategic gifting was once seen as a tactic of the super-affluent, but has now gone mainstream. We're getting inquiries in particular from farmers looking to pass on assets such as land to the next generation without triggering a big inheritance tax bill."
Separate HMRC data released last month revealed a 153% increase in inheritance tax paid on cash gifts over the past decade, rising from £101 million in 2011-12 to £256 million in 2020-21. The number of estates paying the levy on gifts also rose by more than 120%, from 590 to 1,300.
While many are aware of the £3,000 annual exemption and wedding gift allowances, far fewer realise that unlimited gifts can be made out of surplus income without being subject to the seven-year rule. However, these gifts must come from income rather than capital, and HMRC will scrutinise whether the donor had sufficient income left to maintain their usual lifestyle.
