Families across Britain risk losing thousands of pounds to inheritance tax without realising they have broken the rules. What appears to be a simple way to pass on wealth during a lifetime can quickly backfire if it is not handled correctly.
New figures from TWM Solicitors show that 220 gifts worth a combined £61million were caught out by HMRC during the 2023–24 tax year, leaving families facing unexpected inheritance tax bills.
The issue relates to what HMRC calls “gift with reservation of benefit rules”, which are designed to prevent people from giving assets away on paper while still continuing to use or benefit from them.
Passing on wealth during a lifetime can be an effective way to reduce the value of an estate and lower a future inheritance tax bill. This works if the individual survives for seven years after making the gift, or if the gift falls within tax-free allowances.
However, complications often arise when physical assets such as property, jewellery or artwork are involved. In many cases, individuals had technically given these away but continued to use them, meaning the rules were breached.
For inheritance tax to be reduced, the asset must be given away completely, with no ongoing benefit retained. If not, HMRC may still treat it as part of the estate, leaving families facing a significant and unexpected tax bill.
Mark Chandler, a financial planner at Shackleton Advisers, explained: “Where a gift is made, and the donor continues to benefit in some way from the asset, a benefit is being ‘reserved’.
In this respect, although the gift remains a legal transfer, it remains inside the donor’s estate for inheritance tax purposes. This would result in a 40 per cent tax charge upon the death of the donor.”
The difficulty lies in how HMRC defines “benefit” – a concept that often diverges dramatically from common sense.
David Little, a financial planning partner at Evelyn Partners, said: “Because the rules don’t just target obvious abuses they can apply to everyday human behaviour, which often catches well-meaning people out.”
The scenarios that trigger these rules can border on the absurd. HMRC guidance suggests that repeatedly returning to a gifted property to collect belongings – even something as innocuous as borrowing books – could establish a pattern indicating continued benefit.
Some gifts and property are exempt from Inheritance Tax, such as some wedding gifts and charitable donations | GETTY
Mr Little noted: “It’s not about the books. It’s about the pattern.”
Valuable jewellery presents similar pitfalls. Wearing a gifted necklace to a family wedding offers no formal exemption, and habitual use — such as donning the same piece every Christmas — risks dragging the asset back into the estate.
Mr Little observed: “Remember, tax law has no concept of sentimentality.”
Artwork cannot remain displayed in the original owner’s home or office, nor can they insure it themselves. Even animals fall under scrutiny.
Mr Chandler recalled a case involving a horse: “The previous owner kept it in their stable, and didn’t charge for livery. From HMRC’s perspective that is not good enough — that horse is not outside of the estate.”
HMRC’s ability to detect such breaches should not be underestimated. In 2010, the tax authority deployed a £100 million supercomputer system called Connect, which Mr Little described as a “digital detective.”
Thousands face ‘sudden and unexpectedly large’ inheritance tax bills | GETTY
The system pulls together information from numerous sources including bank accounts, PayPal, eBay, Airbnb, DVLA records, Land Registry filings and social media platforms. Artificial intelligence then compares this data against tax returns to identify discrepancies.
More than 90 per cent of HMRC investigations are now initiated through insights generated by this technology.
Investigators can examine bank statements to check whether rent was paid, scrutinise insurance policies to see who covers gifted assets, and even analyse social media photographs to determine who wore particular jewellery at events.
Mr Chandler warned: “It only takes a keen investigator, or someone who has taken against you, and who decides to report you to HMRC, to find yourself in hot water.”
Certain patterns tend to attract HMRC’s attention, according to Mr Little. Gifts made later in life, assets that are easy to continue using, and arrangements that appear tidy on paper but seem impractical in reality all raise suspicions.
More than 90 per cent of HMRC investigations are now initiated through insights generated by this technology
| GETTY
“The rules are deliberately unforgiving,” he said.
The fundamental choice facing anyone wishing to reduce their inheritance tax burden is stark: either walk away from the asset completely, or pay full market value for any continued use while maintaining thorough records.
Mr Little added: “Anything in between is where people get caught. And often, it’s not the big, deliberate schemes that fail — it’s the small, human habits that seem too trivial to matter. Until they do.”
Mr Chandler also urged discretion, noting that people can be “surprisingly vocal about their tax planning” — sometimes to their own detriment.