HMRC is turning a spotlight on UK families as certain gifts to loved ones unintentionally trigger substantial inheritance tax bills. In the 2023-24 tax year alone, approximately 220 gifts valued at £61 million breached HMRC’s “gift with reservation of benefit” rules, resulting in surprise tax liabilities.
Mark Chandler, a financial planner at Shackleton Advisers, explains the issue: “When a gift is made but the donor continues to benefit from the asset in some way, the benefit is said to be ‘reserved.’ Although the gift legally transfers ownership, it remains part of the donor’s estate for inheritance tax purposes. This can lead to a 40% tax charge upon the donor’s death.”
David Little, a financial planning partner at Evelyn Partners, notes the complexity and unexpected nature of these rules. “They don’t just target obvious tax avoidance schemes; they often catch out well-meaning individuals engaging in everyday behaviours,” he says. Mr Little points out examples such as gifts made later in life, gifts that are easy to continue using, and arrangements that appear sensible on paper but aren’t practical in real life.
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“The rules are deliberately strict,” he adds. “Many people fall foul because of small, human habits that seem insignificant until HMRC investigates.”
Since 2010, HMRC has used a sophisticated data analysis system known as Connect, a £100 million ‘digital detective’ that scans various data sources including bank statements, insurance policies, land registry records, utility bills, social media photos, estate agent listings, and even witness statements to detect undeclared wealth or tax underpayment.
While HMRC does not apply this extensive scrutiny to every case, it intensifies investigations when estates are under question or facts are contested. Mark Chandler warns, “It only takes a determined investigator or someone motivated to report you to HMRC for you to find yourself under scrutiny.”
UK families are advised to understand these complicated rules to avoid costly inheritance tax surprises associated with seemingly simple gifts.