HMRC found that 45% of the population were not aware of the tax implications or exemptions relating to gifting. Of those who were influenced by the rules, only 12% said they would not have given the gift if the exemptions had not been in place.

Under the rules, gifts are exempt from IHT after seven years.

In HMRC’s opinion, the figures suggest that a small proportion of gifters – close to 1% – are primarily motivated to give gifts because of the IHT rules.

With 12% of gifts handed out by those aged 70 and over worth £20,000 or more, Laura Suter, a personal finance analyst at investment platform AJ Bell, points out that those who are older must make sure they don’t fall foul of the gifting rules. If the gifter dies within seven years, the beneficiary could end up with a tax bill.

Lack of knowledge

Suter added that the lack of awareness about the gifting rules poses a challenge.

“People gifting money with no awareness of the inheritance tax rules are leaving their heirs a potential minefield to navigate should they die, but a lack of understanding around gifting rules also means many could be missing out on passing on potentially lucrative gifts tax-free.

“A worrying trend among lower earners is that people are often borrowing money and taking on debt in order to gift money to other people. The second most common reason to gift money was to help with living expenses, followed by clearing debts, showing that many on lower incomes may be in the perverse situation of borrowing money in order to help others repay their own debt,” she explained.

Suter’s sentiments were echoed by Rachael Griffin, tax and financial planning expert at wealth manager Quilter, who refers to gifting during a lifetime as a “perverse game of Russian roulette” – due to potentially exempt transfers.

“Essentially people have to ask themselves: Do you think you’ll live longer than seven years? How much money are you willing to put on that bet? With the Office for Tax Simplification already taking a close look at inheritance tax, it’s interesting to see that HRMC is also doing some digging.

“One way to simplify things is to update the heavily outdated gifting allowance. The annual IHT gifting allowance has remained unchanged at £3,000 since 1981 and had the allowance been tracked to inflation, it would be permissible to gift £11,296 per tax year in 2018,” she explained.

HMRC’s figures also showed that money was not only flowing from parents to children, but also from middle aged individuals to their parents. This highlights the challenges facing the so-called ‘squeezed middle’ generation, who are supporting their children and ageing parents.

The report found that 15% of people gifted money to their parents – often to pay towards care. Another 14% gave to siblings, while the same number gave cash to friends.