“Gifts Gone Wrong”: Inheritance Tax and Lifetime Gifts
Many families are increasingly worried about “Gifts Gone Wrong”, where lifetime gifts intended to reduce future Inheritance Tax (IHT) liabilities end up creating unexpected tax bills.
Recent HMRC data, released to investment firm RBC Brewin Dolphin through a Freedom of Information request and reported by The Times, shows that these “Gifts Gone Wrong” situations are becoming more common and more costly for households across the UK.
In this article, Solicitors Eloise Bishop and Elizabeth Rowlands summarise the new statistics and explain the potential pitfalls of lifetime gifting. They also outline how early legal advice can help prevent “Gifts Gone Wrong” and support effective, compliant estate planning.
For detailed information on lifetime gifting, please see our Lifetime Gifts article here.
What the New Stats Tell Us About Lifetime Gifts and IHT
According to the Freedom of Information data provided by HMRC to RBC Brewin Dolphin, 14,030 lifetime gifts became liable for IHT in the 2022 to 2023 tax year. These are classic examples of “Gifts Gone Wrong”, where gifts failed because the donor did not survive long enough or because the gift was not structured correctly.
Key findings include:
- The average failed gift was £171,000, leading to a potential IHT charge of £68,400
• The top 25 failed gifts averaged £7.9 million, with possible tax charges of up to £3.1 million
These figures show the scale of “Gifts Gone Wrong” across the UK. Gifts intended to reduce IHT liability are failing and are being pulled back into people’s estates for IHT purposes.
Even modest gifts are increasingly at risk of being captured. With the value of people’s assets increasing, whilst the nil rate band allowance remains frozen, more families are being caught in the IHT net.
How the Seven-Year Rule Leads to “Gifts Going Wrong”
The seven year rule is one of the main reasons why failed gifts occur.
Most lifetime gifts are Potentially Exempt Transfers (PETs). A PET becomes fully exempt only if the donor survives seven years after making the gift.
If the donor dies:
- Within three years: the gift may be taxed at the full 40 percent
- Between three and seven years: taper relief applies but tax can still be significant
Gifts With Reservation of Benefit: A Key Cause of “Gifts Gone Wrong”
One of the most frequent causes of failed gifts is the Gift With Reservation of Benefit (GROB) rule. A gift is not effective if the donor continues to benefit from the gifted asset.
A common example is gifting a property but continuing to live in it rent-free.
In these cases, the gifted asset remains part of the estate for IHT purposes.
For more information on this area, please see our article on Gifting Property here.
HMRC also offers useful guidance on Gifts With Reservation of Benefit (GROB) (IHTM47060) which can be accessed here.
Partial Gifts and Discounted Sales Can Backfire
Selling an asset for less than the market value is considered to be a partial gift for Inheritance Tax purposes.
The difference between the market value of the asset and the sale price is treated as a gift and therefore the seven-year rule applies.
People may assume that it cannot be a gift if money is changing hands. However, this does not protect them from IHT because HMRC rules treat undervalue sales as gifts.
If the donor does not survive seven years, and there are no allowances available, the partial gift can trigger an unexpected IHT bill.
This is another common example of “Gifts Gone Wrong” in practice.
Why These Mistakes Are Becoming More Expensive
The nil rate band has been frozen at £325,000 since 2009. It is expected to remain frozen until 5 April 2031. Meanwhile, property and asset values have continued to grow.
This means:
- More estates now exceed the threshold
- Many individuals have already used their nil rate band
- Lifetime gifts are more likely to fail and become taxable
The HMRC data highlights the seriousness of this issue. The average failed gift of £171,000 could trigger a tax charge of £68,400. This shows how financially damaging “Gifts Gone Wrong” can be.
Common Mistakes When Making Lifetime Gifts
The most frequent errors include:
- Gifting assets while continuing to benefit from them
- Leaving gifting too late and not surviving the seven year period
- Misunderstanding available tax exemptions
- Failing to coordinate lifetime gifts with Wills and wider planning
At Crane & Staples, our Private Client team regularly advises on these issues and can help you avoid “Gifts Gone Wrong”.
Please do not hesitate to contact us if you would like further guidance on how to avoid these pitfalls and effectively navigate lifetime gifting.
How to Plan Lifetime Gifting to Avoid Unexpected IHT
If you are planning on making lifetime gifts, we recommend:
- Keeping a detailed record of all gifts given, including dates and values.
- Obtaining accurate valuations of your property and assets.
- Confirm that you have not retained any benefit
- Ensure all exemptions and allowances are applied correctly
- Review your Will alongside previous gifts and estate planning
You may consider taking legal advice to confirm that no benefit has been retained from gifted assets and that exemptions have been applied correctly. A legal professional will be able to advise you about coordinating lifetime gifts with your Will, and wider estate planning.
Contact Us
If you would like further advice on preventing “Gifts Gone Wrong”, please contact our specialist private client team at Crane and Staples. We can guide you through lifetime gifting, tax planning and estate structuring to help ensure your gifts achieve their intended purpose.