Fewer than half of people gifting large amounts of money or assets were aware of inheritance tax rules and exemptions, according to HM Revenue & Customs research.
Research from HMRC published today (May 17) surveyed 2,090 individuals on IHT and recent gifting behaviour and found a mere 45 per cent were aware of the tax implications surrounding their gifts.
Of those interviewed by HMRC, one eighth had given a gift within the past two years, with 13 per cent having given a single gift of £1,000 or more, or multiple gifts of at least £250 totalling £3,000 or more.
HMRC found that older people who had substantial wealth or who intended to leave a large inheritance, and were therefore likely to be affected by IHT rules, had a better knowledge of IHT in general and were more likely to be affected by IHT rules when deciding to give a gift.
Overall knowledge of IHT rules and exemptions, among those individuals who did make gifts, was relatively low and among those who did have some knowledge of the IHT rules, the proportion who reported being influenced by the rules was relatively small.
Under the current rules gifts valued at less than £250 individually, and totalling less than £3,000 per year, are exempt from IHT.
IHT becomes payable when gifts are made within seven years of an individual's death, as they will then be added to the total value of the estate and if the total value exceeds the threshold then these gifts are taxed.
Currently, IHT is paid at 40 per cent on a deceased person’s estate above the threshold of £325,000 however, there are a few exemptions.
Where the estate is left to a spouse or civil partner there is no tax to pay and when a home is passed to children or grandchildren the £325,000 threshold rises to £450,000.
Unused reliefs can also be added to partners, for a total exemption of £950,000.
Sean McCann, chartered financial planner at NFU Mutual, said another tax people needed to be wary of when gifting assets was capital gains tax.
He said: "A lot of people are aware they have to pay CGT when they sell something but not as many realise they may be liable for CGT when they are giving something away.
"For example, if I had an asset which has increased in value and then I gifted it to someone, CGT would be payable on the gains made."
According to HMRC the most common form of gift was money, with three-quarters (76 per cent) of gifters giving this. The payment of expenses was also common, with more than a quarter (29 per cent) gifting in this way.
Although it was expected that more older people would gift property, the reverse of this was found with 40 per cent of 18 to 29 year olds gifting property compared with seven per cent of those aged 70 and over, despite lower home ownership levels.
HMRC found that gifts that were influenced by IHT rules and exemptions were more likely to take the form of money.
Families paid a record £5.4bn in tax revenue in the 2018-19 financial year, with the average inheritance tax (IHT) bill reaching almost £200,000, according to data published on May 15.
Analysis of HMRC receipts by NFU Mutual found 27,000 families were hit with IHT bills in 2018/19, with the total bill increasing £200m on the previous tax year and £600m on the financial year ended April 2017.
NFU Mutual’s analysis also found that 5,000 individuals paid IHT last year while they were still alive as a result of gifts to certain types of trust that can trigger a bill.
A review of IHT is currently underway as the Treasury is keen to simplify its rules.
The IHT review was commissioned by Chancellor Phillip Hammond last year after he said in January he was concerned the system was "particularly complex".
Alan Chan, director at IFS Wealth & Pensions, said: "It’s quite surprising really when you think about it especially where large amounts of money is involved and less than half of those people are actually aware of the inheritance tax rules and exemptions.
"The most common mistake I tend to come across is where individuals gift an asset whilst retaining benefit of it and do not realise that the gift is ineffective for IHT purposes because it’s not a true gift.
"Inheritance tax can be mitigated with the right planning so it’s important to get proper financial advice as it may well prevent costly mistakes from being made."
amy.austin@ft.com
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