Prime Minister Andy Burnham – new rules around inheritance tax are coming in next April (Image: Getty Images)
Changes to the law around inheritance tax which will come in now Andy Burnham is Prime Minister next year have led to people investigating special ‘gifting’ measures they can take to avoid it being eaten up in tax. From April 2027 any pensions left after a person passes away will be subject to tax, BBC Radio 4’s Moneybox program was told.
However, a tax expert told people that they can take advantage of rules which allow people to pass on money without paying tax, and a key number is £3,000. And it was also told that people can use the regulations around ‘surplus income’ to pass on money tax-free as well, but the expert warned it was crucial to keep records.
Host Paul Lewis explained: “Inheritance tax is probably the most hated of all taxed – 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.
“It’s understandable, I suppose, that people who will pay it will want to minimise the amount the treasury takes. One way to do it that I sometimes recommend is just to spend it or give it away. New research from the independent financial advisors The Private Office found that more than eight out of 10 of their middle-aged or older clients believe parents and grandparents should pass wealth down before they die.”
Listener Simon said that he and his partner want to help their children while they are still alive so they can see them enjoy the money. Both their sons are thinking about getting married and asked if he was to give £13,000 in one year, exceeding the £3,000 rule by £10,000 then “Two weeks later I was hit by a bus at what point do HMRC tax that money. Would the tax man just take 40% of that £10,000 or does that get added to the value of my estate and only taxed on the overall value of the estate?”
Another listener asked about passing on money to relatives living overseas in New Zealand and wondered about surplus income.
David Dodgson, chartered financial planner from The Private Office was asked about the gift of £13,000 first. On if it would be taxed he said: “Not immediately, no. What a lot of people forget to think about are the exemptions you’ve got in terms of inhertance 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.“
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?”
On the 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.”
In terms of records for the regular gifts he explained people should look at the IHT403 form HMRC has on its website here has a breakdown of the sorts of things to document.
In terms of gifting growing Mr Dodgson said: “A key catalyst for this sort of gifting has undoubtedly been the impending disappearance of pensions into the IHT (inheritance tax) 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.’” He added: “Well 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.”
Listen to the full Radio 4 show here.