Families face £600m tax bill for wrongly gifting homes

AN inheritance tax clampdown has resulted in families being handed a £608million bill for incorrectly gifting their homes to their children.

Close to 2,000 families have been ordered to pay back millions in inheritance tax over the past five years by HM Revenue & Customs (HMRC), falling foul of so-called “gift with reservation of benefit rules”, official figures obtained by this newspaper show.

Among them were parents who had gifted their homes to their children for tax purposes, but who continued to live in the properties without paying market rates of rent.

While gifts such as property or cash lump sums are tax exempt from inheritance tax if made at least seven years before death, the tax authority has powers to claw back the money saved if the person making the gift has continued to enjoy or benefit from the asset in any way.

Experts warned that more families faced being caught up in the HMRC crackdown, as the growing tax burden on households, combined with the cost of living crisis and rising house prices, drive up levels of tax avoidance.

Andy Butcher, of wealth manager Raymond James, said: “We get calls regularly from people trying to do this, but unless they pay rent to their children they risk the plan backfiring later – and HMRC will clamp down on it.

“When the tax burden is high tax avoidance also goes up, with people going further to sidestep taxes, whether through legal means or otherwise.”

Mr Butcher said typically the executor of the estate was liable to pay the backdated charges, meaning friends of the deceased could be forced to pay thousands out of their own pockets.

The only way for families who have gifted their homes without moving out to avoid contravening the rules is to carry on paying market rent as long as they live in the property, he added.

The amount of tax collected by the Treasury has hit record levels, it emerged this week, with tax receipts climbing to a high of £718billion in 2021-22. A spokesman for HMRC said guidance on gifting tax rules was available on its website.