Financial experts say more families are exploring inheritance tax gifting rules (Image: Getty)
Households are being urged to understand the UK’s £3,000 inheritance tax gifting rule as families look for ways to reduce future tax bills ahead of major changes coming into force from April 2027.
The warning comes after financial experts said more people are exploring tax-free gifting rules following plans for unused pension pots to become liable for Inheritance Tax from April 2027. The changes, which have been linked to proposals under an Andy Burnham-led Government, are expected to bring more estates into the inheritance tax net.
Speaking on BBC Radio 4’s Moneybox, presenter Paul Lewis said inheritance tax remains “probably the most hated of all taxes”, despite only around one in 20 estates currently paying it.
The £3,000 annual exemption allows each person to give away money tax-free every tax year. (Image: Getty)
He pointed out that the nil-rate threshold has remained frozen at £325,000 since 2009 and warned that unused pension savings will soon be counted as part of a person’s taxable estate.
Mr Lewis said: “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.”
Research by independent financial advisers The Private Office found that more than eight in 10 middle-aged and older clients believe parents and grandparents should pass wealth on before they die rather than leave it through their estate.
Chartered financial planner David Dodgson told the programme that one of the most valuable reliefs available is the annual £3,000 inheritance tax exemption.
The allowance lets every individual give away up to £3,000 each tax year without the gift forming part of their estate for inheritance tax purposes. The exemption can be given to one person or split between several recipients and, if unused, can normally be carried forward for one tax year, allowing gifts of up to £6,000.
Mr Dodgson was responding to a listener who wanted to give his children £13,000 in one year and asked what would happen if he died shortly afterwards.
He explained that the annual exemption is only one of several available reliefs, adding that parents can also give up to £5,000 to a child as a wedding gift free from inheritance tax.
Another increasingly popular exemption involves gifts made from surplus income.
Mr Dodgson said people with income above their normal living costs can make regular gifts that immediately fall outside their estate for inheritance tax purposes, provided they can demonstrate the payments came from surplus income and maintain appropriate records.
He advised families to keep detailed evidence of such gifts and referred listeners to HMRC‘s IHT403 form, which sets out the information executors should retain.
Mr Dodgson 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 inheritance tax – what can I do with it?’
“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.”
The annual gifting allowance has also previously been highlighted by money expert Martin Lewis, who discussed the rules with Lucie Spencer, tax partner at Evelyn Partners.
She explained that each individual can give away £3,000 every tax year without it counting towards inheritance tax and recommended keeping written records of all gifts alongside a will to make the administration of an estate easier.
Currently, individuals can usually leave up to £325,000 free of inheritance tax, rising to £500,000 when passing on a main residence to direct descendants. Married couples and civil partners can transfer unused allowances to one another, potentially allowing up to £1 million to be passed on tax-free if all qualifying conditions are met.