Be aware of HMRC rules on Inheritance Tax gifting says TWP

Surrey accountancy firm TWP is calling on people to be aware of the strict rules on making gifts as part of their Inheritance Tax planning.

The firm is reminding families who may be considering gifting property or money to be aware of the rules, to avoid sanctions from HM Revenue & Customs (HMRC).

Lump sums of cash or gifting property can be IHT-free as long as the person lives another seven years after making these gifts. This is commonly known as the ‘seven-year rule’.

Over the past five years, HM Revenue & Customs (HMRC) has retrieved more than £700 million in Inheritance Tax (IHT) from 2,100 families who attempted to minimise tax charges through lifetime gifting.

Emma Croft, Private Client Tax Manager at TWP, said:” Making gifts during your lifetime is a known method of managing and minimising IHT liabilities prior to your death, but HMRC has ruled that many families may have breached regulations by doing this.”

This tax relief sees the tax rate on gifts in excess of the Nil Rate Band tapered down as follows:

  • 3 to 4 years – 32 per cent
  • 4 to 5 years – 24 per cent
  • 5 to 6 years –16 per cent
  • 6 to 7 years – 8 per cent
  • 7 or more – 0 per cent

An example of this is if a parent continues to live in the same house after gifting and transferring ownership to their children.

Instead, if the parent wants the gift to remain IHT-free, they will need to either move out or pay rent to the new owner. This rent would need to be reviewed annually to ensure that it did not generate an IHT liability. Regardless of paying rent, the seven-year rule to gifts for IHT purposes will still apply.

The 1986 “gift with reservation of benefit” rule allows HMRC to demand IHT if the gift giver continues to benefit from the gift, such as living in a gifted property. To avoid IHT, the giver must either move out or pay rent at market value, with the seven-year rule still applicable.

“The gifting property or money is a perfectly legal step to take when planning your tax affairs. However, anyone considering this option must seek professional legal advice when considering this option,” Emma added.

If you require assistance with personal tax planning, speak to our team today