Data obtained by financial advice firm, NFU Mutual, showed that more than 5,000 estates paid in excess of £1bn in IHT on lifetime gifts in the tax years 2020- 2024.

Currently non-exempt gifts made during an individual’s lifetime are not subject to inheritance tax, if the person making the gift lives for seven years afterwards. However, if they die within seven years the gift is included in the inheritance tax calculation. 

Figures released in a Freedom of Information (FoI) request to HMRC showed that 5,080 estates in the four tax years between 2020 and 2024 paid IHT on gifts after the individual failed to live for seven years after a gift was made.

The £315m of IHT paid on late gifts in 2023-24 equated to an average of £226,000 for each of the 1,390 estates caught in that year the figures show.

Sean McCann, chartered financial planner at NFU Mutual, said ‘’Making gifts can be a very effective way of reducing your potential inheritance tax liability. With pensions set to be caught in the tax net from April 2027, it’s likely we’ll see more families making gifts to mitigate the impact. “ 

“There is a widely held misconception that if you make a gift and survive at least three but less than seven years, the inheritance tax due on the gift reduces on a sliding scale. However, what happens in practice is that any gifts made in the seven years before death ‘eat’ your £325,000 tax free allowance first, with the tapering of the tax only applying to any part above £325,000.

“As an example, if you make a non-exempt gift of £100,000 and die six years later, this will reduce your standard £325,000 tax-free allowance to £225,000 and there will be no tax to pay on the gift.

“However, if you make a non-exempt gift of £425,000 and die six years later, the first £325,000 would ‘eat’ your full tax-free allowance (meaning your family would have no tax-free allowance to use against the rest of your estate) and the £100,000 balance of the gift would be chargeable at 40% (£40,000) but you would benefit from a reduction of 80% of the tax due, giving a tax bill of £8,000.” 

He added: “Inheritance tax is one of the most feared and least understood taxes. It’s possible we could see changes in the gifting rules in October’s Budget, with restrictions on some of the exempt gifts including ‘gifts from normal expenditure’ which allows you to give away unlimited regular gifts from income immediately exempt from inheritance tax provided it leaves you with sufficient income to maintain your standard of living.”

“This exemption is often used to fund grandchildren’s school fees or channel regular income into pensions or other investments held in trust for younger generations of the family. The unlimited nature of this exemption favours those with high incomes, which may make it an attractive target for the chancellor.”