Inheritance tax rules are complex, and the stakes are high (Image: Getty)
Families looking to reduce their inheritance tax exposure are being warned to tread carefully or they could come unstuck and end up with a hefty tax bill anyway. The nil-rate inheritance tax (IHT) band has been frozen at £325,000 since 2009 and is currently due to remain frozen until April 2031, along with the £175,000 residence nil-rate band. This leaves more estates exposed as property and other asset values rise. IHT receipts hit a record £8.5billion in 2025/26 and the Office for Budget Responsibility forecasts they will hit £15billion a year by 2030/31. Some are paying more than they need, after making a costly mistake.
Former chancellor Rachel Reeves’ decision to make most unused pension funds and pension death benefits liable to IHT from April 2027 is prompting more families to consider giving money or assets away during their lifetime. But it’s tricky. One catch is that gifts can still count towards an estate if the donor dies within seven years of making them.
New figures obtained by NFU Mutual show that 5,080 estates paid more than £1billion in IHT on lifetime gifts during the four tax years to 2024. In 2023/24 alone, 1,390 estates paid £315million in IHT on gifts made less than seven years before death. The average bill was £226,000. Sean McCann, chartered financial planner at NFU Mutual, warned that many misunderstand the seven-year rule. “There is a widely held misconception that if you make a gift and survive at least three but less than seven years, the IHT due reduces on a sliding scale.”
In fact, taper relief only applies to the tax due on the part of gifts above the available £325,000 nil-rate band.
For example, someone giving away £100,000 and dying six years later would use £100,000 of their £325,000 allowance, leaving £225,000 available against the rest of their estate. There would be no IHT on the gift itself.
If they gave away £425,000 and died six years later, the first £325,000 would use the whole allowance. The remaining £100,000 could face IHT, although six-to-seven-year taper relief would reduce the effective tax rate to 8%, producing an £8,000 bill. But this would have wiped out the nil-rate band for the rest of their estate.
This is obviously complex, and may take time to get your head around it. Most families won’t need to worry about it, but those who do should take the threat seriously. Financial advice could more than pay for itself here.
McCann also warned that October’s Budget could further tighten gifting rules, including the exemption for regular gifts from surpluls income. This could be an attractive target for Chancellor John Healey because its unlimited nature favours people with high incomes.
There’s another reason to take care. HMRC suspects wealthy individuals may have underpaid as much as £392million in IHT in the year to March 2026, according to TWM Solicitors.
Duncan Mitchell-Innes, deputy head of private client and partner at TWM, warned: “HMRC’s increasingly sophisticated data analytics are making it easier for them to spot underpayments.”
Those checks can include comparing the value of jewellery, watches and paintings with their insurance values. HMRC’s powerful AI-fuelled systems can also track transfers to overseas accounts, compare probate information with self-assessment tax returns, and scrutinise property valuations against comparable homes in the local area.
Families should keep detailed records of gifts, dates and values, and take professional advice before making significant transfers. A little upfront planning could prevent a very unwelcome tax bill later.
