Three years ago, my uncle Terry passed away. He left behind a house, some savings and what he believed to be a clever plan to dodge inheritance tax. He’d put the house into a trust for my cousins, lived in it another six years and then died thinking he’d done right by his kids.
Spoiler alert: HMRC had different plans.
So when I read about the inheritance tax mistake Chugtai family made in May 2025, it felt way too close to home. Because honestly? Uncle Terry made the same mistake, and it ended up costing my cousins almost forty grand they didn’t have.
The Case That’s Got Everyone Worried
This is what happened to the Chugtais. Mr Chugtai died, and his daughter Afsha assumed that all issues had been resolved regarding his estate. He had been a wise estate planner — or at least, that was the family’s belief. Set up trusts to protect the family’s assets from inheritance tax, which is what you’re supposed to do.
The estate was valued at £843,950, including a property with an attached shop worth £380,000 and £62,239 in a Santander trust account. Not millionaire money, but enough to be slapped with a sizable tax bill if things went south.
And boy, did things go wrong.
Afsha Chugtai lost her appeal against HMRC’s assessment that the £442,000 value of the assets in the trusts should be included in the estate calculation. The family was hit with a £176,000 inheritance tax bill, which took them completely by surprise.
Where It All Went Sideways
The problem? Mr Chugtai had received funds from the trusts for seven years before his death. The main issue here is the seven-year rule, which unexpectedly affects families in various ways.
You see, there is this thing in the law called “gift with reservation of benefit”, which basically means you can’t give something away and still use it. It makes sense when you think about it, but many miss this. My uncle Terry certainly did.
Afsha said that her father was forced to return to the property due to her sister’s health conditions, as he felt he had no choice in the matter. I felt sympathy for her when I read that. She was attempting to look after her sister; she was processing the death of her father, and then along comes HMRC with this huge bill.
But HMRC wasn’t having any of it. They successfully argued that he’d benefited from the property, which meant the trust didn’t actually protect the assets from inheritance tax.
The Seven-Year Rule Everyone Thinks They Know
All right, let’s talk about this seven-year thing, because it’s more complex than people think. By putting an asset into trust, you no longer own it, and the land can pass tax-free after seven years, provided gift rules have been followed.
Sounds straightforward, yeah? Give a gift, stay alive for seven more years, and problem solved.
Except it’s not that simple. Under the “seven-year rule”, people can give money or other assets to their heirs tax-free or at a discounted rate, provided they live for seven years after making the gift. But, and this is the colossal but, you have to actually give it away correctly. Can’t be living in the house. Can’t be using the money. You can’t be profiting from it in any way.
My mate Simon’s dad attempted this last year. He put his house in a trust for Simon and his brother, then proceeded to continue living there without paying rent. I attempted to advise him he’d never be able to, but he assured me that his solicitor had handled everything.
Guess who’s now dealing with a tax bill?
Why This Keeps Happening
The inheritance tax mistake the Chugtai family made isn’t rare. It is happening everywhere, wherever coffins are being lowered into the soil, and most of those responsible won’t even know they have cocked it up until someone dies and a representative of HMRC comes knocking.
The family was hit with this bill after their deceased relative fell foul of property gifting rules. But here is the thing: they likely thought they did everything right. They had set up the trusts, worked out the paperwork, and crossed all the t’s.
The problem is that inheritance tax law in Britain is about as clear as mud. You’ve got your potentially exempt transfers, your chargeable lifetime transfers, and your gifts with reservation of benefit. It’s like they designed the system to be as confusing as possible.
What My Uncle Terry’s Mistake Taught Me
After Uncle Terry died in 2022, my cousins discovered he’d put his house in trust back in 2017. ‘Brilliant,’ they thought, as that was well past the seven-year mark, no worries.’
Except Terry had never actually stopped living in the house. He paid for all the utilities, did the maintenance, and treated it like his own property because, well, he’d lived there for forty years.
The tax bill that landed was brutal. My cousin Sarah had to remortgage her own house to pay HMRC. She’s still angry about it now, three years later. “Dad was just trying to help us,” she keeps saying. And he was, but he just didn’t know the rules properly.
How to Actually Get It Right
Look, I’m not a tax expert. But after watching my family and the Chugtais go through this nightmare, I’ve learned a few things.
If you’re putting property in a trust and you want to keep living there, you need to pay market rent. Proper rent, not some token amount. HMRC will check, and they’re not stupid.
Better yet, actually move out. Give the property away properly. I know that sounds harsh; it’s your home; you’ve lived there for decades. But if you’re serious about avoiding inheritance tax, you can’t have your cake and eat it too.
Get proper professional advice. Not just any solicitor, but someone who specialises in inheritance tax planning. And be completely honest with them about what you want to do. They can’t help you if you’re not upfront about your plans.
The Bigger Picture
The really frustrating thing about cases like this is that people are just trying to look after their families. Mr Chugtai wasn’t some tax dodger trying to scam the system. My uncle Terry wasn’t either. They were just regular blokes who wanted to pass something on to their kids without HMRC taking a massive chunk.
But the rules are the rules, and HMRC doesn’t care about your good intentions. They care about whether you followed the regulations properly.
Since May 2025, when the Chugtai case made headlines, I’ve had at least five conversations with friends and family about their own estate planning. Everyone’s suddenly worried they’ve made the same mistake.
Probably some of them have.