Beneficiaries hit by £111m IHT bill for ‘gifts gone wrong’

25 January 2018

Beneficiaries were hit by an extra £111m in Inheritance Tax bills last year, after HMRC picked on technical mistakes made in 400 cases where gifts were made to loved ones, says Wilsons, the private client law firm.

Mistakes can arise when the person making a gift keeps some benefit for themselves – so-called ‘gifts with reservation of benefit’. For example, an individual might give a property to their adult children but continue to live there – hence retaining a benefit.

Wilsons says it is easy for individuals to be caught out by the complex rules surrounding gifts. In many cases, individuals will make gifts while retaining some benefit from the asset being given, without realising it will incur a substantial IHT bill.

If made properly, it is possible for a gift to be exempt from all IHT. Usually, property or other high-value gifts are exempt from IHT, as long as the individual survives for seven years after making the gift, or they pay for any benefit they receive from the property they give away.

However, gifts with reservation of benefit are always liable for inheritance tax, and cannot be exempt. The value of the gift will still form part of the donor’s estate for IHT purposes after death, and will be taxed accordingly.

Wilsons says that in many cases, it is better for parents simply to downsize their home and give children a cash sum, rather than giving a property incorrectly which can give rise to a substantial tax bill.

Rupert Wilkinson, Partner at Wilsons, says: “Hundreds of people are falling into the gift with reservation trap every year, and their heirs are hit with an unexpected IHT charge as a result.”

“The last thing most parents want is to land their children with an unexpected and unaffordable IHT bill after they’ve gone. In many cases, the recipient of the gift will actually be forced to sell the property anyway, in order to pay the IHT.”

“People are continuing to pay a very high price for making simple, easily avoidable mistakes when making gifts. It is very important for those considering gifts to the next generation to take professional advice. The complex tax rules on giving while reserving a benefit can have unforeseen, expensive and upsetting implications.”

Back to news