Families have been warned that they could face inheritance tax (IHT) bills from HMRC if a relative dies within seven years of making a lump sum cash gift. The warning follows a misconception about how gifts are treated under inheritance tax rules, and comes as changes announced for April 2027 will bring unused pension funds into the IHT net.
Seven-year rule and potentially exempt transfers
Under current rules, people can give away lump sums of any size through what are known as potentially exempt transfers. If the person who makes the gift survives for seven years after giving it, the gift normally falls outside their estate for inheritance tax purposes. However, if they die within those seven years, the gift can be brought back into the scope of IHT.
The warning applies to households where a person dies within seven years of making a gift. Sarah Coles, head of personal finance at AJ Bell, explained that when someone dies, it is their estate that is liable for inheritance tax, but there are exceptions. Gifts worth up to the value of the nil rate band during the previous seven years are brought back into the estate on death.
How gifts are brought back into the estate
Coles said that if someone has given away more than their nil rate band, the gifts are brought back in chronological order. Once the nil rate band is used up, there is tax to pay on any subsequent gifts. She added that taper relief may apply and bring the rate of tax down, but it is payable by the person who received the gift.
She also warned that if a person was given a gift but the giver insisted it be spent on something like a property, the recipient may be left unable to pay the bill without borrowing the cash.
April 2027 pension fund changes
From April 2027, under Labour Party leader Andy Burnham, unused pension funds will be brought into the inheritance tax net. The changes were previously announced by former Chancellor Rachel Reeves but will now be overseen by Burnham and his new Chancellor, John Healey. The changes are aimed at encouraging more people to consider lifetime gifting as a way to reduce the value of their estate.
The warning comes as households run the risk of falling foul of HMRC inheritance tax rules due to a misconception around gifts. State pensioners could also face a £98 HMRC bill under the new rules, which remain unclear.
