Alterations to inheritance tax legislation taking effect next year under Prime Minister Andy Burnham have prompted a rush to explore gifting arrangements to prevent wealth being diminished by taxation. From April 2027, any pensions remaining after death will be liable for tax, BBC Radio 4's Moneybox programme was told.
£3,000 annual gift allowance explained
A tax specialist informed listeners that they can benefit from regulations permitting tax-free transfers, with a key figure of £3,000. People can also utilise provisions surrounding 'surplus income' to hand over money tax-free, though the expert stressed the importance of maintaining records.
Presenter Paul Lewis explained: "Inheritance tax is probably the most hated of all taxes - even though in fact 19 out of 20 estates do not pay it. The threshold where it begins though has been frozen at £325,000 - in its case since 2009. From April any pension money that's left over when you finally go will count as part of your taxable wealth too and so the number paying it will rise."
Who pays inheritance tax and how to reduce it
Upon death, individuals can typically transfer up to £325,000 (the nil-rate band) without taxation, increasing to £500,000 when bequeathing a primary residence to descendants. Unlimited wealth can be transferred to a spouse or civil partner, or charitable organisation, entirely exempt from Inheritance Tax (IHT), with unused allowances transferable. A married couple can bequeath up to £1 million tax-free. Beyond this, IHT liability can be reduced through gifting.
Listener Simon asked about gifting £13,000 in a single year, exceeding the £3,000 allowance by £10,000, and what would happen if he died soon after. David Dodgson, chartered financial planner from The Private Office, said: "Not immediately, no. What a lot of people forget to think about are the exemptions you've got in terms of inheritance tax. One of the really important ones is regards to marriage because you've got the ability to gift £5,000 to your child in respect of their wedding, and that won't be subject to an inheritance tax liability."
Surplus income gifts and record-keeping
Mr Lewis added: "And of course there's a £3,000 limit apart from that and it applies to married couples - they each have that £3,000 and I think you can go back a year - so can you actually give £12,000 away without worrying about it if you haven't done it before?"
Regarding gifts from surplus income, Mr Dodgson explained: "It's attracting a lot of attention at the moment. Essentially it's really important that you assess whether or not you've actually got any surplus income because if you have and you can prove it and document it you can give that away on a regular basis and when you've passed away, your executor if they've got evidence that it was surplus income, ie, above your expenditure requirements, that will not be within the inheritance tax net."
He advised that for record-keeping of regular gifts, people should refer to the IHT403 form on HMRC's website. On increasing gifting, he said: "A key catalyst for this sort of gifting has undoubtedly been the impending disappearance of pensions into the IHT net from April 2027. That has resulted in people thinking 'right, I don't want to have my pension subject to an inheritance tax - what can I do with it.' You can start gifting away regularly during your lifetime to reduce the amount in your pension that's going to be subject to inheritance tax liability."
Martin Lewis podcast discussion
The issue was previously discussed on the Martin Lewis podcast. He asked Lucie Spencer from Evelyn Partners: "There's a £3,000 rule isn't there?" Lucie explained: "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 queried: "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.'"
