Brits urged to check if they benefit from £3,000 inheritance tax rule | Personal Finance | Finance

Savers and investors are being urged to maximise their tax-free allowances as the end of the financial year looms. Brits have been hit with a number of tax changes in recent years which increase personal tax burdens and eat away at disposable incomes. Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, said such changes make the case for tax-efficient saving and investing even more compelling.

She said: “Chancellor Rachel Reeves’ decision in the Autumn Budget to extend the freeze on income tax thresholds until April 2031 will gradually drag millions more people into higher tax bands as wages rise. The Budget also set out two-percentage point increases in tax rates on dividends from April and on savings interest and property rental income from April 2027.”

In October 2024, investors were hit with hikes to Capital Gains Tax rates – to 24% for higher rate taxpayers and 18% for basic rate taxpayers.

There are also future tax changes for pensions to grapple with, including the decision to bring unspent pension assets within the scope of Inheritance Tax (IHT) from April next year.

Savers aged under 65 will see a new cap on the Cash ISA allowance at £12,000 from the same date. There has also been no change to the Personal Savings Allowance since it was introduced in 2016.

Bestinvest said getting the most from allowances while they remain in their current form is essential for anyone looking to ease a rising tax burden.

It urged Brits to “use it or lose it” as most allowances cannot be carried forward to the next tax year.

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One action recommended by the firm is to give a loved one a financial gift to reduce your Inheritance Tax bill.

Those who can afford to give money away to family members or friends can take advantage of exemptions so the gift does not form part of their estate for Inheritance Tax purposes when they die.

Ms Haine said this may make even more sense now unused defined contribution pension pots will be subject to Inheritance Tax at the death of the holder from April 2027.

She added: “Extending IHT to cover pension assets has seen more retirees reconsider how they access their pension pots, with many either choosing to spend the money or gift it rather than preserve it.

“This tax year and next, however, the existing IHT allowances still apply. This includes a nil rate band of £325,000 and an additional £175,000 residence nil rate band available where a main residence is left to direct descendants, and the total value of an estate falls below £2million.

“A cushion of up to £500,000 per person, or £1m for a couple, might sound generous, but increasing numbers of estates are becoming subject to IHT as property and share prices continue to rise.”

The expert explained that in addition, IHT allowances will remain frozen until 2031 after the Chancellor extended the freeze by a year at the recent Budget, just 12 months after extending it by two years.

She warned while a financial gift to children and grandchildren can be an “effective” way to reduce an IHT liability for those at risk of breaching their nil rate bands, if the giver does not live more than seven years after making the gift, the estate or even the recipient of the gift themselves might have to pay IHT.

Sums falling outside the IHT exemption level currently attract a 40% tax-charge payable by the deceased’s beneficiaries. When pensions come under the scope of IHT from April 2027 even more people could find themselves facing a hefty tax bill.

Ms Haine said: “Thankfully, exemptions outside the seven-year rule continue to enable people to make financial gifts without triggering an IHT bill.”

These include up to £3,000 which can be given away every year tax-free. This allowance can be carried forward for one tax-year, meaning you could gift up to £6,000 in a lump sum free from future IHT liabilities.

For couples, those figures double, with up to £6,000 per couple per tax year and up to £12,000 if the allowance is carried forward for a year.

You can also make multiple cash sums of up to £250 per recipient without affecting IHT liability.

In addition, you can give away unlimited amounts provided the money comes from your regular income, such as wages or pensions, rather than capital and does not diminish the giver’s standard of living at all. In effect, it must be affordable after covering normal outgoings.

Parents can also give £5,000 to a child, while grandparents can gift £2,500 to a grandchild or great grandchild to help cover wedding expenses.

The 2025-26 tax year ends at midnight on April 5.