The taxman has begun a crackdown on people who try to avoid the burden of inheritance tax by making gifts to friends or relatives before they die.

The move will mean that officials at Revenue & Customs scrutinise in more detail the value of money, investments, possessions or property given away in the years immediately before a person’s death.

The crackdown comes amid calls for the Government to lessen the impact of inheritance tax on families. The number of people who have paid the tax has surged by 72 per cent since Labour came to power in 1997.

The inheritance tax issue has risen in prominence with the strong growth in the housing market, which has increased the value of a typical estate. Inheritance tax applies to the estates of people who die with assets worth more than £300,000, once debts have been allowed for.

The rising property market has pushed the value of many people’s estates above the £300,000 threshold, forcing the inheritors to pay 40 per cent taxation on the value of the estate in excess of £300,000.

Although the threshold has been rising, it has failed to keep up with the pace of the housing market. The level is now near £30,000 short of the average price of a house in the UK.

The threshold is set to rise to £312,000 next year and £325,000 in 2009-10.

The increase in the number of people hit by the tax has been accompanied by a jump in inheritance tax revenues. The Government last year booked revenues of £3.3 billion, up from £1.7 billion in 1997. Current forecasts suggest that £3.6 billion will be raised for the 2006-07 tax year.

The current rules allow some large gifts to go untaxed, as long as they are made more than seven years before the donor dies. However, where the gift is a house, the person giving the house would be expected to pay rent, at a commercial rate, where they continued to live in it. The receiver of the rent would then be subject to income tax on the sums received.

Revenue & Customs said that there was now “an increased likelihood that we will ask for further information or seek explanation of what has occurred”, where information provided by those administering the estate is unclear or incomplete.

When a person dies, the executor of the estate is required to declare gifts made prior to the death.

The fresh crackdown will continue until March next year and will include deeper examination of where assets may have been transferred from the person who died. Revenue & Customs has the power to demand financial documents and can levy fines against the executor and the beneficiary of the inheritance. The examination will include looking for examples of loans that were forgiven or the transfer of an asset into joint ownership.

Revenue & Customs said that it would open a formal inquiry where necessary and ask for more information from bereaved families to ensure all necessary information had been obtained. Where a person involved in winding up the estate is found to have been negligent in not disclosing a gift made by the dead person, Revenue & Customs said that it would consider imposing a penalty.

Pressure on the Government to review inheritance tax rules was increased this week at the Liberal Democrats’ party conference, where the party proposed increasing the threshold from £300,000 to £500,000.

Earlier this month, Joyce and Sybil Burden, two sisters aged 89 and 81 respectively, from Marlborough, Wiltshire, lodged an appeal in Strasbourg to win the same exemptions from inheritance tax rules that married or gay couples in civil partnerships enjoy. Under inheritance tax rules, one of the sisters will have to pick up the inheritance tax bill for the house they share when the other dies.

Collecting billions

— Inheritance tax is levied at 40 per cent on estates worth more than £300,000

— Gifts made to family and friends more than seven years before your death are usually exempt

— The number of people liable has risen by 72 per cent since 1997

— Revenues from inheritance tax have jumped from £1.7 billion in 1997 to £3.3 billion in 2005-06

— In 2007-08 revenues are projected to hit £4 billion

Source: HM Revenue & Customs; HM Treasury