HMRC time limit explained as 'you may not realise' you have to pay this tax

People planning their financial affairs need to plan several years in advance to avoid paying a hefty 40 per cent tax bill. More families are becoming subject to inheritance tax (IHT), as general inflation and rising house prices means the value of people's estates is going up, with more people crossing the tax-exempt thresholds to have to pay the levy.

Lorraine Wilson, principal associate in the private wealth team at national law firm Weightmans, warned that ever more people are being dragged into paying the tax "without realising it".

She said the tax is not just for the wealthy, as more families are crossing over into being liable for the tax. This can be simply because your house has increased in value, or as you have built up investments or savings over time.

Each person has a standard tax-free allowance of £325,000 in total assets they can pass on when they die, with an extra £175,000 allowance if you are passing on your main residence to a direct descendant.

You can pass on any of these unused allowances to your spouse or civil partner when you die, meaning they are effectively doubled for them when they eventually die and pass on their estate.

Fortunately, there are several things you can do to reduce your liability or even avoid the tax altogether, one of which is to reduce the size of your estate by giving away gifts.

But there are several HMRC rules to consider here, as whether or not your gifts will be IHT-free depends on the amount you give and when you give it.

One such rule is the seven-year limit on giving gifts. Ms Wilson said: "Someone giving away assets late in life may not realise that gifts made within seven years of death can still be taxed."

There are certain amounts you can give away each year without paying any tax, and any gifts above these amounts will also be exempt, as long as you survive for another seven years after you give the gift.

In light of this limit, Ms Wilson said it is important to take "early action" to get your estate in order and think about your inheritance tax liability.

She explained: "Giving away assets during your lifetime, whether smaller gifts within the annual exemption or larger transfers under the seven-year rule, can make a big difference.

"For those whose wealth is tied up in property or investments, there are structured options like trusts or family investment companies. These can help you pass wealth down the generations while keeping some flexibility."

You can give away up to £3,000 a year tax-free, divided between different people, and you can also give any number of gifts up to the value of £250 to different people, as long as you have not used your other allowances on the same people.

Looking ahead, there are some important changes to inheritance tax that families should note. Labour has announced plans that from 2027, unused pension funds will also be subject to inheritance tax.

The Government has yet to provide exact details on how this will work and who will be affected by the new rules.