The number of families facing unexpected inheritance tax bills on gifts from loved ones has more than doubled in the past decade.

HM Revenue & Customs (HMRC) recoups hundreds of millions of pounds annually in inheritance tax (IHT) on gifts that don’t meet its seven-year rule, emphasizing the importance of early gifting.

According to the rule, some gifts are tax-free if the donor survives for at least seven years after making them. If the donor dies before this period, the gift is included in their estate and may be taxed, depending on the estate’s value.

The number of estates paying IHT on gifts increased from 590 in 2011-12 to 1,300 in 2020-21, per data obtained by wealth manager Evelyn Partners through a freedom of information request.

The IHT collected on gifts surged from £101 million in 2011-12 to £256 million in 2020-21.

The seven-year rule offers relief, allowing substantial gifts, such as money for house deposits and university fees, to be tax-free. HMRC scrutinizes any gifts if it suspects tax has been underpaid or avoided.

Ian Dyall from Evelyn Partners stated: “More families are making gifts in their lifetime to reduce their estate size, as more estates become liable for IHT, and it is an increasing burden.

“Sometimes the donor does not live long enough for the estate to realize the full tax benefit. In other instances, there is a lack of awareness or misunderstanding of gifting rules.”

Inheritance tax is widely disliked, even though only about 4% of estates are subject to it. The government collected a record £7.5 billion in IHT in 2023-24, with an even higher amount expected this year. Approximately £2.8 billion was paid between April and July, up £200 million from the same time last year.

Inheritance tax is typically charged at 40% on estates valued above the £325,000 threshold. Anyone passing a family home to a direct descendant gets an additional £175,000 tax-free allowance, provided the estate is worth £2 million or less. This allowance decreases by £1 for every £2 exceeds the £2 million mark.

Anything left to a spouse or civil partner is exempt from tax, and their allowances can also be inherited, enabling couples to pass on up to £1 million tax-free.

However, gifts made within three years before death can be taxed at 40%, and those given three to seven years before death are taxed on a sliding scale, starting at 32% and decreasing to 8%. Gifts given more than seven years before death are tax-free.

Dyall noted, “It can be tricky to make lifetime gifts that are entirely safe from IHT, and suddenly facing a 40% tax bill on a large sum can be challenging for many people.

“Anyone receiving a significant gift from an elderly relative should assess the tax implications before spending it or investing it in something illiquid, like property.”

Keeping records of lifetime gifts is essential to help executors and families determine what is exempt from IHT and challenge HMRC disputes.

Nimesh Shah from accountancy firm Blick Rothenberg mentioned that people often get caught out because they delay making gifts.

“No one wants to think about death and taxes, so they postpone it. But as one gets older, surviving the full seven years becomes less likely, making early planning crucial. There’s also a common misconception that giving away an asset eliminates IHT,” Shah explained.

Small gifts that are exempt from IHT can be made. For instance, one can give away £3,000 annually without it becoming taxable later. Regular gifts are also allowed, provided they do not impact the donor’s standard of living and are taken from income, not savings or capital.

A parent can give up to £5,000 tax-free to a child or stepchild for a wedding or civil partnership. Grandparents can gift £2,500, and anyone else can give £1,000.