Giving £250 gifts to 400 individuals, who subsequently pay these sums to your daughters, intends to dodge inheritance tax on a £100,000 estate.
Under current UK inheritance tax (IHT) rules, gifting large sums of money to multiple people with the intention of having them gift the same amount back to the original donor's beneficiaries may not be an effective strategy to avoid IHT.
The seven-year rule is a crucial factor in IHT exemptions. If a person dies within seven years of making a gift, the gift may still be subject to IHT, even if it is part of a chain of gifts involving multiple intermediaries. Taper relief may apply to reduce the tax, but the original donor's estate could still be liable for IHT.
The UK introduced the 'General Anti-Abuse Rule' (GAAR) in 2013 to target taxpayers who avoid paying tax in ways not in the spirit of the rules. If enough tax is at risk and there is a pre-planned element involving multiple people, the GAAR could come into effect for IHT.
Tax expert David Denton of Quilter Cheviot suggests considering an alternative approach to the proposed plan. He advises making gifts out of surplus income, where the gift is part of your normal expenditure and leaves you able to maintain your usual standard of living.
Gifts can come from various sources, such as salary, dividends, pension income, or rental income, providing options that are within the rules of the UK tax system.
It is essential to note that there is no legitimate "loophole" allowing the bypassing of IHT simply by passing gifts through multiple people. HMRC assesses the substance of transactions and may view such schemes as avoidance.
Inheritance tax receipts have been on the rise, with a significant increase to £8.2 billion from April 2024 to March 2025, a rise of more than £800 million compared to the same period the previous year.
Sources: - [Inheritance seven-year rule explained – taxesforexpats.com, cpduk.co.uk, lanop.co.uk] - [UK Budget Inheritance Tax 2025 overview – lanop.co.uk] - The annual inheritance tax-free gift limit is £3,000. - Pensions are set to fall into the inheritance tax net from 2027. - Marriage gifts can be up to £5000, according to the relationship between the donor and recipient.
In light of the UK's General Anti-Abuse Rule (GAAR), avoiding personal-finance obligations like taxes may not be achievable through intricate strategies that involve multiple people, such as gifting money with the intention of it being returned to benefit the original donor. Instead, considering a strategy that aligns with the rules, like making gifts from surplus income, could be more effective and less likely to attract the attention of HMRC. Additionally, as pensions will become subject to inheritance tax from 2027, it's crucial to plan personal-finance matters considerately to minimize tax liabilities in the future.
