The £3,000 annual gift allowance for inheritance tax (IHT) is under scrutiny as rules are set to change under the new Labour Prime Minister Andy Burnham. BBC Money Box presenter Paul Lewis explained the reforms on the latest edition, noting that IHT is widely disliked despite only 19 out of 20 estates paying it.
Understanding the £3,000 Gifting Rule
Paul Lewis highlighted that the IHT threshold has been frozen at £325,000 since 2009. From April 2027, any pension funds left at death will count as taxable wealth, increasing the number of estates liable. Lewis advised: “One way to minimise the tax is to spend it or give it away.” Research from The Private Office found that over 80% of middle-aged or older clients believe wealth should be passed down before death.
A listener named Simon asked about gifting £13,000 in one year, exceeding the £3,000 allowance by £10,000. He queried whether HMRC would tax 40% of the excess immediately or add it to his estate’s value. David Dodgson, a financial expert, clarified that the tax is not applied immediately and reminded listeners of other exemptions.
Marriage Exemption and Other Allowances
Dodgson explained: “One important exemption is the marriage gift allowance. You can gift up to £5,000 to your child for their wedding without IHT liability.” Paul Lewis added that couples each have a £3,000 annual exemption and can carry forward unused allowance from the previous year, potentially gifting up to £12,000 tax-free. “It’s really important to assess whether you have surplus income,” Dodgson said. “If proven and documented, regular gifts from surplus income are not subject to IHT.”
Pension Changes Looming
Dodgson noted that the impending inclusion of pensions in the IHT net from April 2027 is driving more people to consider gifting. “People are thinking, ‘I don’t want my pension subject to IHT – what can I do?’” He recommended starting regular gifting during one’s lifetime to reduce the pension pot subject to tax. This advice is particularly relevant as Prime Minister Andy Burnham, who succeeded Sir Keir Starmer, has confirmed no early election, ensuring the April 2027 timeline remains.
