To ‘skin’ someone is gambling slang, and has been since the 1800s. It means to win all of a player’s money. From this comes the word ‘skint,’ which means ‘broke’ and ‘skinflint’ to refer to a loan shark. To ‘strip’ someone means that not only did you win all their money, but their clothes as well. Or perhaps it was hust a shirt, as in ‘take the shirt off their back.’
In modern times, ‘skin’ is also used to mean stealing, or cheating someone. If you want to be more intense about it, you say, ‘skin them alive.’
However, to ‘skin someone alive’ is always used as an exaggerated threat, as in, “I’ll skin you alive if I catch you doing that!” It’s a metaphor for, “I’ll be very angry if you do that!” It might mean to beat up on somebody, or punish them severely in some other way.
The literal meaning of ‘to skin someone’ is simply to remove their skin, as you might skin a deer you have just killed. But to skin someone while they are alive would be to inflict horrible pain and suffering.
It’s probably how gruesome the expression sounds that keeps it to casual and facetious uses. If you heard someone announce, “When the police catch that murderer, they’re going to skin him alive,” you might get the uncomfortable feeling that the expression is being used literally.
The phrase is something my mother was apt to yell at me when I was a kid and doing something she didn’t like. I never took her seriously, so it didn’t have much effect.