New rules incoming are ‘key catalyst’ for people seeking to avoid losing out in tax, BBC expert said
People worried about changes to the law around inheritance tax can take advantage of a little known measures they can take to avoid it being eaten up in tax – with at much as £12,000 gifted in one go. From April 2027 any pensions left after a person passes away will be subject to tax, BBC Radio 4’s Moneybox program was told.
The change has led to many people looking again at what they can leave their families in the event of their death – and how to give them as much as possible without losing large chunks in tax. In the UK, you can reduce your Inheritance Tax (IHT) by using tax-free allowances including the £3,000 annual exemption, £250 small gift allowances, and the seven-year rule for larger gifts.
And on Moneybox, the hosts were told by one expert that in fact people could give £12,000 away in one year with 2 children – so £6,000 each – under a certain set of circumstances. 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.“
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 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?”
What counts as a gift
HMRC says Gifts include:
- money
- household and personal goods, for example, furniture, jewellery or antiques
- a house, land or buildings
- stocks and shares listed on the London Stock Exchange
- unlisted shares you held for less than 2 years before your death
A gift can also include any money you lose when a person sells something for less than it’s worth. For example, if they sell a house to a child for less than its market value, the difference in value counts as a gift. Anything people leave in their will does not count as a gift but is part of their estate. The estate is all the person’s money, property and possessions left when they die. The value of the estate will be used to work out if Inheritance Tax needs to be paid.
Mr Lewis added: “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 10 of their middle aged or older clients believe parents and grandparents should pass wealth down before they die.”
On the issue of 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 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.”
Married couples and civil partners in the UK benefit from a 100% spousal exemption, allowing unlimited assets to pass tax-free upon death. Unused tax-free allowances (£325,000 nil-rate band and £175,000 residence nil-rate band) can be transferred to the survivor, enabling a combined total of up to £1 million to pass tax-free. Unmarried cohabiting partners do not receive these exemptions. [1, 2, 3]
Rules on giving gifts
HMRC says Inheritance Tax may have to be paid after your death on some gifts you’ve given.
Gifts given less than 7 years before you die may be taxed depending on:
- who you give the gift to and their relationship to you
- the value of the gift
- when the gift was given
Annual exemption
You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’.
You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.
You can carry any unused annual exemption forward to the next tax year – but only for one tax year.
The tax year runs from 6 April to 5 April the following year.
Small gift allowance
You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.
Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.
The 7 year rule
No tax is due on any gifts you give if you live for 7 years after giving them – unless the gift is part of a trust. This is known as the 7 year rule. If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.
Gifts given in the 3 years before your death are taxed at 40%. Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.
Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.
For more information from HMRC click here. Listen to the full Radio 4 show here.