Families are being urged to understand the UK's £3,000 inheritance tax gifting rule as major changes from April 2027 will include unused pension pots in inheritance tax calculations. The warning follows proposals under an Andy Burnham-led Government, which are expected to bring more estates into the inheritance tax net.
Inheritance Tax Changes from April 2027
From April 2027, unused pension savings will become liable for Inheritance Tax. Currently, only around one in 20 estates pay the tax, but the nil-rate threshold has remained frozen at £325,000 since 2009. Speaking on BBC Radio 4's Moneybox, presenter Paul Lewis said inheritance tax remains "probably the most hated of all taxes". He added: "It's understandable, I suppose, that people who will pay it will want to minimise the amount the Treasury takes. One way to do it that I sometimes recommend is just to spend it or give it away."
£3,000 Annual Exemption Explained
The £3,000 annual exemption allows each individual to give away money tax-free every tax year. The allowance can be given to one person or split between several recipients. If unused, it can normally be carried forward for one tax year, allowing gifts of up to £6,000. Chartered financial planner David Dodgson said: "A key catalyst for this sort of gifting has undoubtedly been the impending disappearance of pensions into the IHT net from April 2027." He added that people are thinking, "I don't want to have my pension subject to inheritance tax - what can I do with it?" and recommends regular gifting during lifetime.
Other Gifting Reliefs Available
Mr Dodgson explained that the annual exemption is only one of several reliefs. Parents can also give up to £5,000 to a child as a wedding gift free from inheritance tax. Another increasingly popular exemption involves gifts made from surplus income. People with income above normal living costs can make regular gifts that immediately fall outside their estate, provided they can demonstrate the payments came from surplus income and maintain appropriate records.
Expert Advice on Record-Keeping
Mr Dodgson advised families to keep detailed evidence of such gifts and referred listeners to HMRC's IHT403 form. Lucie Spencer, tax partner at Evelyn Partners, also recommended keeping written records of all gifts alongside a will to make estate administration easier. Research by The Private Office found that more than eight in 10 middle-aged and older clients believe parents and grandparents should pass wealth on before they die rather than leave it through their estate.
Currently, individuals can leave up to £325,000 free of inheritance tax, rising to £500,000 when passing on a main residence to direct descendants. Married couples and civil partners can transfer unused allowances, potentially passing up to £1 million tax-free if all conditions are met.
