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From what I've grasped from the gov.uk website, you can gift as much as you like to anyone without paying any tax, as long as you don't die in the next 7 years. So why doesn't everyone just gift money to each other, to avoid paying tax?

For example, I could let 3 lodgers live with me for free (a room each). They could gift me £4000 a year each. I would pay no tax and keep £12,000 a year. If instead they paid me rent, I would pay income tax on anything over £7,500 (thanks to the Rent-a-room scheme).

I'm guessing this is too good to be true, but if so, how would the law argue against this?

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    ...because you'd be obviously lying? Providing a living space for people in exchange for money is not a gift. It's a trade. – Kilian Foth Feb 6 '18 at 11:18
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    Because you'd go to jail. – Richard Feb 6 '18 at 15:28
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    @HopelessN00b - No, intentionally using the gifting system to evade IHT is a form of fraud; Per the HMRC Manual - "If you suspect that any of the following apply you should refer the matter to your B2 manager ... the taxpayer has conspired with a third party to defraud HMRC" – Richard Feb 6 '18 at 16:59
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    If you were intentionally giving tax exempt gifts to someone who was your landlord in order to avoid paying tax, you'd almost certainly be charged with Revenue Fraud ("cheating the Public Revenue contrary to Common Law)". Your landlord would be charged with the same offence. The offence would be Revenue Fraud - other revenue fraud offences - And categorised as A7. Typical sentencing would be 26 weeks - 2 years custody. – Richard Feb 6 '18 at 17:05
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    If I were a lodger of yours I wouldn't give you any "gift" and if you came to me I'd just tell you that if you push it again I'm going to disclose all of this to the police, so basically you are actually giving me a 100% free place to live in for quite some time. – Bakuriu Feb 6 '18 at 21:35
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In short, because the government is not required to honor your characterization of the transaction.

A gift is something given without receiving anything in exchange. In almost all taxable contexts this is not a plausible argument. A judge would almost surely rule for the government that your money transfer was rent and not a gift, for example. And, if you didn't report the income that was found to be rent and not a gift, on an income tax form, you would be assessed serious penalties and might even be charged with criminal tax evasion, since the sincerity of your gift would be in doubt.

Also, while in the bare example of an informal roommate arrangement, proof of the existence of a lease in the event of a dispute between the parties might not be necessary, usually contractual documents are in place to protect the rights of both parties to a transaction and those would be inconsistent with a gift characterization. For example, if you sell lumber on credit and it was treated as a gift, you couldn't sue someone who failed to pay for their lumber, and if you sold lumber for cash, it would be a clear quid-pro-quo.

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    It’s a clear case of the duck test – Dale M♦ Feb 5 '18 at 22:10
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    (i.e. "If it looks like a duck, quacks like a duck, and acts like a duck, the government will call it a duck no matter how much you insist it's a labradoodle.") – Stackstuck Feb 6 '18 at 7:04
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    @AJFaraday That would be considered bartering and you would probably have to determine set-offs. I am not a tax expert: you'd have to verify exactly how you'd get assessed: it probably would be a lot of paperwork to save very little overall. – ErikF Feb 6 '18 at 9:04
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    @ErikF I'm also not a tax expert either, but I would expect the law to draw a distinction between "paying" a friend who lets you stay in their spare room with the odd box of chocolates (nowhere near the market rent for the room) and "paying" them with a car (comparable in value to the market rent). I doubt that everyone whose live-in girlfriend has ever washed the dishes is theoretically obligated to pay tax on the labour. (Of course, it's hard to say without knowing the law, since even blatant undeclared sublets for money are common among young renters and don't get pursued by the taxman.) – Mark Amery Feb 6 '18 at 14:03
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    @Stackstuck I figured it was "If it looks like a duck, quacks like a duck, and acts like a duck, the government will find a way to tax it." =) – Cort Ammon Feb 6 '18 at 15:22
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Why doesn't everyone in UK just pay with exempted gifts?

Very short answer to complement ohwilleke's one:

Gifts cannot be paid with.

If you are paying with something it is a payment, not a gift.

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What you could do (and this is skirting the law) is drawing up a rental agreement that gives them living space for free. And without mentioning the rental agreement at all, they decide to give you a gift at the end of the year....

You, obviously, have no legal standing to ask for rent. You gave a gift.

If you make an agreement (even verbal) that their gift is in exchange for your gift, you are no longer able to call them gifts since it's an exchange of money for living space.

In short: As soon as you ask for a gift (especially with specific amounts) in exchange for living space you have a rental arrangement and no gifts. The same way as giving a politician a gift in exchange for them making a decision is suddenly a bribe.

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    This is obviously an attempt to avoid tax on the rental income, which is illegal as another answer has made clear. A rental agreement that doesn't include paying rent, whether cash or in valuable goods and services, is not actually a rental agreement. We do not condone breaking the law. – Nij Feb 6 '18 at 18:41
  • As I said in the answer, you can't mention any gift in return.... – xyious Feb 6 '18 at 21:44
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    @Nij expect anyone who does this to be "stiffed" out of their "rent" since the "tenant" has no obligation to give them gifts. – immibis Feb 6 '18 at 22:54
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    As I understand it (IANAL), a contract in English law requires consideration in both directions. Thus, a document in which one person promises to provide a room and the other promises nothing is not a valid contract. In that case, neither the "landlord" nor the "tenant" would have any rights as a result of the agreement: the "tenant" would be under no obligation to pay and the "landlord" under no obligation to provide the room. And HMRC would not accept the "coincidence" of the "tenant" annually "gifting" an amount to the "landlord" that just happened to be a fair rate of rent. – David Richerby Feb 7 '18 at 13:34
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    Conversely, if the tenant provided minimal consideration (e.g., £1 per year in rent), the landlord would have no right to evict them for non-giftment of the gift. And it would still be blatant tax fraud. – David Richerby Feb 7 '18 at 13:38

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