‘Home gifts gone wrong’ bring in £261m for taxman since 2016

The taxman has cashed in on £261m of “gifts gone wrong” in the past two years as rising property prices and complex rules around inheritance have led to hundreds of people losing out.

Figures from HMRC obtained through Freedom of Information requests showed that attempts to give away assets worth £128m backfired in the 2017-18 tax year. In the previous year £133m in gifted assets fell into the tax net, affecting more than 840 estates.

Normally, if you live for at least seven years after making a gift of a cash lump sum or a property, for example, that gift is free from inheritance tax (IHT).

Estates worth more than the personal allowance of £325,000 are taxed at a rate of 40pc. Many people choose to make gifts in the later stages of life as a way to reduce the value of their overall estate, thereby cutting their tax liability.

However, complex tax rules mean some gifts can lose this valuable relief. These rules, which affect “gifts with reservation of benefit”, come into play if the giver continues to benefit in some way from the gift. The most common example of this is when elderly parents make a gift of their home but continue to live in the property. For this to benefit from the tax break the elderly parents would have to pay their children a market rate of rent – not just for the seven years from the gift being made but until the property was sold or they went into long-term care or died.

Also, the children would have to pay tax on the rental income they received at 20pc for basicrate taxpayers, 40pc for higher earners or 45pc for additional-rate taxpayers.

If the children decided to sell the property after their parents’ deaths, a large capital gains tax bill could apply if the property had increased in value since the change of ownership.

If these requirements are not met, the gift will forfeit its IHT exemption.

Experts have warned that giving away a home for IHT purposes may not be as efficient as some generally believe, and that the taxman is increasingly scrutinising estates.

Last year the taxman raked in more from IHT than ever before – a total of £5.2bn.

Rupert Wilkinson of Wilsons, a law firm, said the complex rules were little understood and the end result could be both costly and upsetting. He added: “Rising property prices mean hundreds of heirs are being hit by very substantial IHT bills, simply through misunderstanding how gifts must be made.

“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 that can give rise to the estate paying a considerable tax bill. To avoid making costly mistakes, parents may want to consider putting sentiment aside and selling the family home.”