Millions of over-55s plan to take advantage of the £3,000 annual gifting allowance to support family members before a rule change next year brings most unused pension pots into inheritance tax, new research shows.
An estimated 2,790,000 people in pre-retirement plan to give away £3,000 on average, according to the Great British Retirement Survey. From April 6 2027, most unused defined contribution pension funds will be included in the value of an estate.
Cliff Edge for Retirement Savers
Craig Rickman, personal finance expert at Interactive Investor, said: "The end of the current tax year is shaping up to be something of a cliff edge for retirement savers." He added: "Pensions have traditionally been one of the most tax-efficient ways to pass on wealth, but bringing unused savings into the inheritance tax net is prompting many to rethink their estate planning strategy."
However, he warned that making big financial decisions in response to a tax change "could leave you short" later in life. He advised looking at tax efficiency in the round, saying: "Tax efficiency matters, but not at the expense of your own financial security." Pensions still come with valuable tax advantages, and it is important to make the most of other tax-efficient vehicles, such as ISAs, he said.
"Rather than rushing to distribute pension savings before 2027, use this as a prompt to look at your finances in the round," he advised. "Think about how pensions, ISAs, gifting allowances and other savings can work together, and consider professional advice where appropriate."
Gifting Rules Explained
Specialists at AJ Bell explained that people can gift money without incurring inheritance tax, but only certain amounts. AJ Bell said: "Some gifts do not have IHT consequences. There is an annual exemption of £3,000 per person making the gift - so Mum could give one child £3,000 annually, whilst Dad gives the other child the same; these would always be outside the estate. Any unused portion of the £3,000 can be carried forward for one year."
"Small gifts of up to £250 per recipient are also exempt - although this cannot be to the same person as any of the annual exempt gift. Gifts can take the form of either cash or assets, so out of the £250 would come things like Christmas and birthday presents."
"Wedding gifts of £5,000 to a child, £2,500 to a grandchild, and £1,000 to anyone else are also exempt. You can combine this allowance with the annual allowance for gifts, but not the small exemption."
Martin Lewis on IHT Allowances
Personal finance authority Martin Lewis has previously delivered a caution to those providing financial help to relatives, tackling inheritance tax on his BBC Podcast. Currently, people can typically pass on up to £325,000 (the nil-rate band) without incurring tax upon death, increasing to £500,000 when bequeathing a primary residence to direct descendants. An unlimited sum of assets may be transferred to a spouse, civil partner or charity free from IHT, with any unused allowances being transferable. A married couple can leave up to £1 million tax-free, comprising two £325,000 allowances and two £175,000 main residence allowances.
There is also a time constraint, meaning any gifts made seven years or more prior to death are exempt from tax. Martin invited Lucie Spencer from Evelyn Partners to explain the available gift allowances. He asked: "There's a £3,000 rule isn't there?" Lucie clarified: "So there's the large gift allowance, which is £3,000 per individual per tax year. And what that means is I can give £3,000, my large gift allowance, either to one person or split between multiple people and also I could reclaim a tax year as well, so if you haven't given that £3,000 in the last tax year, you can effectively give £6,000 today."
Martin said: "So this is so people understand. This is outside of the 7-year rule. Outside of the giving money from surplus income rule. You, as an individual, can give up to £3,000 per tax year without paying inheritance tax. How do you denote that you're using this large gift allowance? Do you have to note down that's what your intention was or is it just back count?"
Lucy advised: "I recommend with all gifts and that's the small gift allowance of the £250, the large gift allowance of the £3,000 or any gifts are written down on a piece of paper or a spreadsheet and held with your will because when someone passes away and you come to complete their inheritance tax form there's actually a whole list where you have to detail all of the gifts which you've made leading up to your death. So definitely make a note of it and put it in one column and put 'large gifts allowance for this tax year.'"
Summarising the key points, Martin noted: "I can give money from surplus income, I can give money away as long as I last 7 years as a gift without restriction. I can give £3,000 to as many people. The maximum I can give is £3,000, but I could share that between different people. What's the £250 rule?" Lucy explained: "So the £250 rule effectively I could stand on a street corner and give £250 to as many people as I wish. What I can't do is give a person £1 more. So Martin, if I were to give you £250 in this tax year, what I can't do is come back to you and say 'have another £50 on top of that.'"
Martin enquired how this worked alongside the £3,000 allowance. Lucy clarified: "The person who has been given the £3,000 you can't then give them £250. The way I look at it is you give your daughter £3,000 and your grandchildren £250."
Martin then asked: "At what age would you say it is sensible for people to start keeping notes on all this type of stuff?" Tax barrister Harriet Brown suggested: "Early 40s." Lucy said: "I would say in your 50s. Maybe when you've received an inheritance so your wealth is more."
Additional exemptions exist for special occasions when gifting money, enabling family members to contribute financially towards weddings without tax consequences. Harriet explained: "You've got gifts in relation to marriages or civil partnerships, where a parent of either party to the union can give £5,000, so if all four parents gave the maximum, that would be £20,000. Other people who are relations, such as grandparents, could give £2,500, and anyone else could give £1,000 on the occasion of marriage."
