HMRC claws back £650m with inheritance tax trap
The taxman has clawed back £650m from grieving families in the past three years after they fell foul of complex inheritance gifting rules.
In 2019-20 alone, HMRC ordered families to pay £244m in inheritance tax on gifts made during the lifetime of a deceased loved one, according to a response to Freedom of Information request submitted by The Telegraph.
Gifts of more than £3,000 are typically subject to up to 40pc death duty if the giver dies within seven years of making them.
The tax charged on such gifts has been growing year-on-year as receipts balloon after a surge in property prices. Families lost £197m in 2017-18, rising to £201m in 2018-19 and then to £244m in 2019-20.
Shaun Moore of the investment business Quilter said the new data shows the annual exemption of £3,000 is too small and must be updated so more families can escape the punitive charge.
He said: “The annual exemption has remained unchanged for over 40 years. Since then, inflation has made this exemption much less useful, meaning more people are having to breach the allowance to provide meaningful gifts. It is clear that the gifting laws need bringing up to date.”
John O'Connell of the TaxPayers' Alliance, a campaign group, said the £650m tax trap demonstrates how “unfair the whole system of inheritance tax is, with households punished when loved ones die unexpectedly”.
He added: “As well as hammering families that fall foul of the rules, it also acts as a distortion to the tax system by encouraging the premature transfer of assets.”
Giving away money prematurely to beat inheritance rules increases the risk that individuals will be left with nothing to pay for care home fees if they fall ill later in life.
Annual inheritance tax receipts are expected to hit a record £7bn this year, according to the Office for Budget Responsibility (OBR), the official forecaster.
More families are getting dragged into the net as decades of house price growth push their estates over the nil-rate band, which is frozen until 2028 along with other tax thresholds and allowances.
Mr Moore said: “Many people who may not consider themselves wealthy could be caught by the IHT net as their property value has grown significantly in recent years.”
Homeowners get another allowance, called the “residence nil-rate band”, if they pass their property to a direct descendant, but this has also been frozen, at £175,000.
Over the next five years, the OBR estimates that inheritance tax will ensnare 250,000 estates while the thresholds remain frozen. Meanwhile the proportion of estates hit by the charge will leap from 4pc in 2020 to 6.7pc by 2028.
Last week, The Telegraph reported that Labour plans to increase the death tax burden as it develops policies for the next general election.
The Office of Tax Simplification, now disbanded, called for a reform to gifting rules in its 2019 report on simplifying IHT.
The Government body wrote that the seven-year-rule was widely misunderstood by families, urging ministers to abolish a complex tax break known as “taper relief” and reduce the seven-year period to five years because many families struggled to find records that went back that far.
The Association of Taxation Technicians (ATT), a charity, has echoed some of their concerns. Helen Thornley, of the ATT, said: “We believe the inheritance tax system, and especially taper relief, could be simplified and have previously called for the system to be restructured.”
But other groups have gone further, calling for the abolition of the wealth tax. Mr O’Connell said the Treasury “would be better off scrapping the death tax in its entirety”.