You would think giving stuff away is easy – but if you want to gift your home to loved ones, the tax man will step in if you fail to follow some complicated rules.
In just two years, HM Revenue & Customs has taken a slice of £261 million of gifts gone wrong involving 840 estates.
The rules say if someone makes a gift, such as a home, cash or other belongings, and survives seven years after making the gift, then no inheritance tax is due.
Many wealthy individuals take advantage of this rule to make their estates smaller on death so they pay less inheritance tax.
Under current rules, someone can leave an estate of £325,000 plus £125,000 of the value of their main home without paying inheritance tax.
The residence nil rate band rises to £150,000 in 2019-20 and £175,000 in 2020-21.
Under the seven year gift rule, inheritance tax reduces the longer the donor lives.
Seven-year gift tax thresholds
|Years between gift and death||Tax paid|
|less than 3||40%|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
The problem comes with any terms and conditions the person making the gift makes.
A gift is just that – something you give to someone else with no strings attached. That means you lose control of the asset and the person receiving the gift is free to do what they want with it.
But lots of families pass gifts with conditions.
Reservation of benefit
The most popular is gifting a home on condition the parents can live there rent-free.
This is called a gift with reservation of benefit and puts the gift back into the tax net for HMRC.
If the gift is made with conditions and the donor continues to benefit from their former possession, the gift goes back into the inheritance tax pool and if the nil-rate limits are breached, tax is paid at 40% on the balance.
And if the beneficiaries decide to sell the possession after your death, they pay capital gains tax on any profits they make.
This could mean a bright idea about how to save significant amounts of inheritance tax by gifting property can backfire.
HMRC is increasingly poring over property sales, probate papers and tax returns to try to claw back tax wrongly claimed on gifts that never were.