Don’t break these tax rules when passing wealth on

Inheritance tax is levied at 40% on estates worth more than £325,000. Incerasing property prices mean record numbers face paying inheritance tax, particulary because the government has decided to keep the £325,000 allowance frozen for the next 5 years. In 2020-21, 27,000 families paid inheritance tax – but this is expected to rise to 47,000 in 2028

If you think your family faces an inheritance tax bill, the simplest thing you can do to sidestep the duty is give away assets during your lifetime

Gifted cash, property and personal possessions are considered outside of your estate for inheritance tax purposes after 7 years

But beware the pitfalls! If HM Revenue and Customs decides that you’ve given something something away but still benefit from it (a ‘gift with reservation’), it will count towards the value of your estate and your family could be hit with an unexpected tax bill

If the person who died gave a gift and used it in the 7 years before they died, it is seen as a ‘gift with reservation of benefit’. It is not an outright gift and is not exempt

For example, someone could transfer ownership of their house to a relative and continue to live in it without paying rent at the going rate

If they continued to use the gift in the 7 years before they died, it counts as part of their estate. It doesn’t matter when they gave it. It is taxed at the market value at the time of their death as if they still owned it

If they paid rent at the market rate when they gave away their property, they would not have retained a benefit.

However, the property could still be a liability if:

You stay in the property overnight for longer than a month, or almost every weekend, with the new owner
You stay in the property for longer than two weeks without the new owner
You consult or borrow from a “library of books” in the gifted house more than five times a year

Temporary stays are allowed if the donor moves in to recover after receiving medical treatment, to help with domestic duties, such as childcare, or if their own home is being decorated. Find out more about exceptions for infirm relatives in the Gifts with reservation: Inheritance Tax Manual

HMRC also permits donors the use of their old land for dog-walking and horse-riding, as long as this does not impact the new owner’s use of the land.

Gifting cars

After gifting a car, the donor is only permitted to a maximum of three lifts a month in the vehicle

Gifting paintings or jewellery

The ‘gift with reservation’ rules also apply when giving away chattel – personal possessions such as valuable paintings, furniture and jewellery

After giving these items away, they should leave the home of the donor, or the donor could be in breach of the rules

In an example in HMRC’s inheritance tax manuals, if a donor gives away an antique vase to their daughter but pays “full market rental”, she can keep the vase without worrying about inheritance tax

However, if rent is not paid, then the chattel should leave the home. If the possession is valuable enough, HMRC may investigate and visit the property after death to check that it was not kept in the home

All in all – be careful out there!