A mounting number of families are grappling with the unexpected consequences of the inheritance tax system, as new data reveals that hundreds are being hit with hefty bills on substantial gifts. The surge in inheritance tax liability stems from the intricate "seven-year rule," which has increasingly caught families unprepared.
Inheritance Tax Impacting Families: Key statistics
Recent figures obtained through a Freedom of Information request show a significant rise in the number of families paying inheritance tax on large gifts. In the 2020-21 fiscal year alone, 1,300 families faced death duties on cash or property gifted by loved ones. This represents a dramatic increase from 590 families in 2011-12. The collective tax bill for these families amounted to £256 million, a striking 119% rise from the £101 million reported in 2011-12.
The "seven-year rule" stipulates that gifts made within seven years before a person's death are included in their estate for tax purposes. This rule often catches people off guard, particularly when they give away large sums to help family members with significant expenses, such as buying a home.
Why the Surge?
The rise in inheritance tax liabilities is largely attributed to escalating asset prices, which have pushed more estates beyond the £325,000 threshold for inheritance tax. The threshold remains frozen until 2028, although couples benefiting from the residence nil rate band can leave up to £1 million tax-free. However, many families are still finding themselves caught between high asset values and the complexities of the tax rules.
Ian Dyall of Evelyn Partners highlights the growing challenge: “Recipients of large gifts may face unexpected tax bills if the donor passes away within seven years. The question is whether these recipients have the liquidity to cover such costs or if the money has been invested in less liquid assets like property.”
Potential Tax Policy Changes
The discussion around inheritance tax is intensifying as the Labour Party is rumored to consider raising rates to address public finance shortfalls. The potential for increased tax rates and reduced exemptions has led to a wave of concern among wealthy individuals. James Ward from Kingsley Napley reports that clients with estates ranging from £2 million to £5 million are particularly anxious about potential changes that might affect their inheritance tax liabilities.
Government's Position
A Treasury spokesperson has indicated that significant decisions are pending: “Following the spending audit, the Chancellor has made it clear that difficult choices lie ahead on spending, welfare, and tax to address the £22 billion shortfall left by the previous government. Decisions on these matters will be made at the Budget.”
Looking Ahead
As the landscape of inheritance tax continues to evolve, families are advised to stay informed and seek professional guidance to navigate the complexities of tax regulations and potential policy changes. The growing trend of large gifts and the intricacies of the seven-year rule underscore the importance of strategic estate planning to mitigate unexpected financial burdens.
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