British families are being advised to consider making financial gifts to their children now, ahead of a significant shake-up to inheritance tax rules coming in 2027.
The Looming Pensions Tax Change
From 2027, pensions are set to fall into the inheritance tax net, a move that has prompted many households to seek ways to safeguard their family wealth. Research from investment firm Hargreaves Lansdown reveals that approximately 23 per cent of people plan to give away money specifically to reduce a potential inheritance tax bill.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, highlighted the significance of this shift, stating, "Pensions can be one of our biggest assets and so we will see more people facing inheritance tax in the years to come."
How the Surplus Income Exemption Works
Currently, a valuable allowance exists that allows individuals to pass on unlimited amounts of money from their extra earnings completely tax-free. This can help families avoid the hefty 40 per cent inheritance tax that typically applies to estates valued above the threshold.
However, to qualify for this surplus income exemption, three strict rules must be followed. The gifts must come directly from your income, not from your existing savings or assets. They must be given on a regular basis, forming part of your normal expenditure. Crucially, these payments must not reduce your standard of living.
A Word of Caution for Donors
While the strategy is effective for estate planning, experts urge caution. Ms Morrissey warned of the uncertainty involved, noting, "None of us know how long we are going to live or what the future may hold."
She stressed the importance of financial prudence, adding, "With this in mind, it is vital that you don't overspend or give too much money away as there's a chance you could do too much and leave yourself struggling later on."
It is also important to remember that some gifts are always exempt from Inheritance Tax. There is no tax to pay on any gifts made between spouses or civil partners, provided they live permanently in the UK. Gifts to charities or political parties are also entirely free from Inheritance Tax.
