As Rachel Reeves mulls an extension of the seven-year rule covering Potentially Exempt Transfers, wealth manager RBC Brewin Dolphin is urging caution in making sure that a donor’s own needs are met before gifting to family members.
Carla Morris, financial planner at wealth manager RBC Brewin Dolphin said:
“When talking to clients about gifting we always stress the importance of not giving away money that they might need in the future, especially towards any potential future care costs. Extending the seven-year period to 10 may well get people talking about their finances and gifting earlier but it also makes advice even more key because you are having to look even further into the future to ensure your own needs are met.
“And of course, with the longer timescale comes the likelihood that there will be more failed gifts and more IHT to pay, as well as adding more administration and complication to people’s estates.
“A carefully considered lifetime gifting plan can ensure a client gets to see the positive difference they can make to their families lives and financial security, but it needs careful advice and managing, which could include life cover, trusts and definitely needs good record keeping.
“To ensure you can enjoy a long a comfortable retirement as well as help your family it is crucial to plan ahead and take advice.”
“Failed gifts”: the million-pound tax trap
In March 2024, a Freedom of Information request by RBC Brewin Dolphin demonstrated that some of the UK’s wealthiest families were landed with retrospective tax bills in the region of £1.4 million on lifetime gifts, according to latest annual figures.
The families tried to make use of a rule allowing individuals to make gifts of unlimited value which become exempt from inheritance tax if the giver survives a further seven years, known as a “potentially exempt transfer” (PET).
But a Freedom of Information (FOI) request from the wealth manager to HMRC has revealed that 13,380 of these gifts became the subject of inheritance tax (IHT) charged at 40% after the donor sadly died within the seven years.
According to the dossier, the top 50 “failed gifts” in 2020-21 averaged £3.6 million after allowances and exemptions. A gift of this size would trigger an eye-watering tax bill of up to £1,452,000 if the PET failed in the first three years.
The average “failed gift” stood at £156,000 after allowances and exemptions, meaning a recipient paying 40% inheritance tax on that sum faced a bill of £62,400 if the PET failed in the first three years.
Carla Morris, financial planner at wealth manager from RBC Brewin Dolphin, commented: “Inheritance tax is paid by a few but feared by all. Many people resent having to pay tax on income that has already been taxed, especially at a time when they are grieving.
| Failed gift amount | Number |
| £0-£24,999 | 4,510 |
| £25,000-49,999 | 1,490 |
| £50,000-99,999 | 1,850 |
| £100,000-£199,999 | 2,130 |
| £200,000-249,999 | 727 |
| £250,000-£299,999 | 642 |
| £300,000-£399,999 | 897 |
| £400,000-£499,999 | 380 |
| £500,000-£599,999 | 218 |
| £600,000-£699,999 | 169 |
| £700,000-£799,999 | 80 |
| £800,000-£899,999 | 45 |
| £900,000-£999,999 | 52 |
| £1million-£1,999,999 | 143 |
| £2million+ | 50 |
NOTE: Figures are after allowances and exemptions
“Gifting when you are alive has become an integral part of estate planning and can help mitigate exposure to inheritance tax later on, but it’s important to understand the rules and have the right counsel.
“For the gift to be completely tax exempt, the giver must survive the event by seven years, but there is speculation this may rise to 10 years after the upcoming Budget.
“If the donor – usually a parent or grandparent – dies within this time then inheritance tax, on the amount in excess of the available nil rate band, is payable by the recipient on a sliding scale of 8-40% depending on the passage of time that has passed between the gift being made and the donor passing.
“This news can come as a massive shock to people who are already mourning the loss of a loved one. That’s why we would urge clients to plan well ahead of time or consider insurance policies which meet these bills.”
Long-term family wealth planning
Currently, the seven-year clock starts ticking on the day the gift is made. Gifts in the first three years are charged at 40%, and after that, for gifts over £325,000, taper relief kicks in as demonstrated in the table below.
Inheritance tax on gifts above £325,000
| Years between gift and death | Chargeable amount | Effective rate of inheritance tax |
| Less than 3 years | 100% | 40% |
| 3 to 4 years | 80% | 32% |
| 4 to 5 years | 60% | 24% |
| 5 to 6 years | 40% | 16% |
| 6 to 7 years | 20% | 8% |
| 7+ years | 0% | 0% |
Carla Morris said: “It makes sense to sit down with a financial planner early if you want to plan your gifting in the most tax efficient manner.
“Leave it until your 80s, and the risk becomes far greater that you won’t survive the full seven years, or potentially 10 in future.”
Using trusts to mitigate IHT
RBC Brewin Dolphin is encouraging clients to consider long-term family wealth planning alongside making gifts into trust to mitigate the impact of surprise inheritance tax bills triggered by the seven-year rule.
Trusts are particularly attractive to grandparents who are more exposed to the seven-year rule by virtue of their seniority. They allow donors to give away assets indirectly. Typically, a trust is held and managed by a third party known as a trustee.
Often, grandparents will set aside money for grandchildren with the parents as trustees. Money is typically released when the grandchildren are mature enough to make prudent financial decisions. Though this is at the discretion of the trustees and there is no obligation to wait until the child turns 18 or 21.
Carla Morris, financial planner at wealth manager from RBC Brewin Dolphin, commented: “Trusts can be used to ringfence funds in a way that is tax efficient for inheritance. The type of trust is important to consider.
“For example, one type of trust may give the child the absolute entitlement to the money at a certain age, while another may offer the trustees greater flexibility and discretion, even making allowances for children who have not been born yet.
“With so much to consider, it makes sense to have expert advice every step of the way.”
Another option worth considering are gift inter vivos insurance policies which pay-out if the donor doesn’t survive the seven years and a tax demand lands on your doorstep.
Carla Morris, financial planner at wealth manager from RBC Brewin Dolphin, commented: “Long-term wealth planning that considers both your own cashflow needs, and your desire to pass down wealth can help to ensure your loved ones aren’t hit with an unnecessary bill. There will inevitably be occasions when this can’t be avoided and that’s when a gift inter vivos policy might come in – an insurance policy used to cover the inheritance tax liability that can arise when a person makes a gift whilst they are alive, but dies within seven years.
“As you would expect, these policies have a seven-year term and should be placed in a trust, otherwise the benefits from a claim on the policy may be added to the individual’s estate, thereby increasing the tax liability.”
