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People in the UK who have given money to family members in the last seven years might have to pay inheritance tax. HMRC, the tax office, has warned that some people could face unexpected tax charges on gifts they gave in the past.
The government has collected £6.3 billion in inheritance tax between April and December 2024, which is £0.6 billion more than the same period last year. If this trend continues, the total amount collected for the year could exceed the record of £7.5 billion.
Jonathan Halberda, a financial adviser, explained that because the inheritance tax limit has not changed and will stay frozen until 2030, more and more families will have to pay this tax. He said this is happening because property prices and the cost of living have gone up, but the tax-free limit has remained the same.
Inheritance tax is charged on the value of everything a person leaves behind when they die. If the total value of a person’s estate is more than £325,000, anything above that amount is taxed at 40%. This £325,000 limit has been in place since 2009 and has not been increased to match rising house prices and inflation. Because of this, more people are having to pay inheritance tax each year.
During the budget last autumn, Chancellor Rachel Reeves announced that the inheritance tax limit would remain frozen until 2030. This means that for the next several years, more families may find themselves paying inheritance tax on money or property they inherit.
One way people try to reduce the amount of inheritance tax their family will have to pay is by giving away some of their wealth while they are still alive. However, there are strict rules about how this must be done, and the timing of these gifts is important.
Jonathan Halberda explained that each year, a person is allowed to give money as gifts without it being taxed. People can give any amount of money to their husband, wife, or partner without tax. They can also give up to £3,000 a year to other people without it being counted as part of their estate for tax purposes. In addition, small gifts of up to £250 can be given to as many people as they like. Regular payments from a person’s income can also be used to reduce the total value of their estate, which may help them stay below the £325,000 tax-free limit.
However, there are limits. If a person gives away large sums of money and then dies within seven years, the person who received the gift may have to pay inheritance tax on it. If the person who gave the gift lives for more than seven years, no inheritance tax needs to be paid on the gift unless it was part of a trust.
If someone dies within seven years of giving a gift, the amount of tax that must be paid depends on when the gift was given. If the gift was given less than three years before the person’s death, it is taxed at the full 40% rate.
If it was given between three and seven years before the person’s death, the tax rate is reduced gradually through something called taper relief. However, this only applies if the total value of gifts given in the seven years before death is more than £325,000.
Understanding these rules is important for anyone who wants to pass on money to their family while avoiding unnecessary taxes. Planning ahead and being aware of the seven-year rule can help reduce the amount of inheritance tax that needs to be paid.