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Telegraph
6 days ago
- Business
- Telegraph
Families race to transfer cash to kids ahead of inheritance tax reforms
The value of gifts made using a little-known inheritance tax loophole has nearly tripled in a year as families look for ways to reduce their death duty bills. The amount of money transferred using the ' gifts out of surplus income ' tax break rose from £52m in 2022-23 to £144m in 2023-24, data shows. The rule allows any taxpayer to give away unlimited sums of money without getting caught by inheritance tax – as long as the gifts do not diminish their quality of life and the money comes out of income, not savings or other capital. The HM Revenue & Customs (HMRC) figures were revealed through a Freedom of Information request, with the 2023-24 tax year being the latest for which data was available. Experts said the unpublished current figure was likely to be higher as estate owners looked to reduce their liabilities ahead of Rachel Reeves's imminent inheritance tax reforms. In her maiden Budget last year, the Chancellor announced that unspent pensions would be brought into the scope of inheritance tax from April 2027. Families currently receive their late relative's pensions free of inheritance tax, with income tax due if the person died after age 75. Under Reeves' rule changes, the family of someone dying over the age of 75 could see their inheritance reduced by death duties of 40pc, and then pay income tax on the remainder. Duncan Mitchell-Innes, of TWM Solicitors, said: 'Families will soon have fewer ways to transfer wealth without being hit by inheritance tax, so they're increasingly giving excess income to their loved ones. 'As the number of tax-efficient options narrows, families will make better use of the remaining reliefs.' Rise in inheritance tax Labour on Monday confirmed it would press ahead with the reforms despite strong criticism from the pensions industry. It also confirmed that the onus will be on families to calculate the tax due on inherited pension pots. The Government estimated the measure would raise around £1.5bn a year by 2029-30. Transfers of agricultural and business properties will also face a 20pc inheritance tax rate on their value above £1m from April 2026. Transfers of both are currently fully exempt. Inheritance tax is charged at 40pc on the value of an estate worth more than £325,000. Homeowners get an additional £175,000 allowance when passing on a primary residence to direct descendants. Gifts made more than seven years before death are exempt from inheritance tax. Taxpayers also have a £3,000 annual gift allowance – which is designed to cover events including birthdays and religious holidays. But the surplus income rule means that if a family can prove that there were regular payments – which did not have a negative effect on the giver's normal finances – then that money is automatically exempt, and the seven-year rule does not apply. Despite the rule's potential to cut tax bills, it is only used by a small number of estate owners. Just 400 estates benefited from the tax break in 2023-24, down from 520 in 2020-21, according to HMRC figures. The 2020-21 figure represented just 1.7pc of the 27,800 estates which paid inheritance tax that year. Shaun Moore, of wealth management firm Quilter, said: 'Making gifts out of surplus income remains one of the most effective yet underutilised inheritance tax reliefs available. 'Given the upcoming pension tax changes in 2027, it is not surprising that some are looking to take advantage of this and find ways to mitigate IHT liabilities or find ways to pass on money to younger generations.' The Treasury was approached for comment.
Daily Mail
19-07-2025
- Business
- Daily Mail
The innocent inheritance tax blunder that can cost your family dearly
Hundreds of bereaved families are being hit with unexpected inheritance tax bills after falling foul of rules around making gifts. Some 220 estates last year received a tax bill on £61 million worth of gifts given away incorrectly, according to HMRC data obtained by a Freedom of Information request by TWM Solicitors. More families could unwittingly breach the rules and be hit with unwelcome charges as they try to avoid inheritance tax. People making gifts slip up when they hand their loved ones assets, such as property, valuable artwork or fine wine, but still have use of them. This is known as Gifts with Reservation of Benefit – and the taxman treats them as if they have not been gifted at all. For example, a parent might give the family home to a child, which can be done tax-free as long as they live for seven years afterwards. However, if the parent then continues to live in the property they must pay rent at the market rate, or it will be considered a Gift with Reservation of Benefit because they are continuing to use the asset as though it is their own. If they fail to do this, HMRC does not consider it to be a proper gift and, when they die, it will then be taxed as though it is still part of the estate. Another example might be to give away a classic car, but then continue to keep it in your garage, or to gift a holiday home but still make use of it on a regular basis without paying a market rate. Duncan Mitchell-Innes, partner at TWM Solicitors, says: 'Making gifts is now one of the simplest ways of reducing an IHT bill, however many people are making mistakes in the process. Taxpayers should realise that simply handing over legal ownership of an asset isn't enough to satisfy HMRC.' Taxpayers paid a record £8.5 billion in inheritance tax in 2024-25 and £1.5 billion in the first two months of this tax year alone. Currently about 5 per cent of estates are liable for inheritance tax but more are being caught in the net as the thresholds at which IHT kicks in remain frozen but inflation pushes up the value of investments, property and assets. It is expected that the proportion of estates liable for IHT will rise to 8 per cent from 2027, when pensions are brought into the inheritance tax net. For many people, a pension is their most valuable asset, and this change in rules could tip them over the inheritance tax threshold. Kirsty Stone, chartered financial planner at The Private Office, says: 'We have seen a massive inflow of enquiries around inheritance tax and gifting since the pension changes were announced. 'A lot of people might think that giving away their home seems like a quick fix, without realising the intricacies of the rules.' Shane van Rossum, a retired school registrar, hoped to pass her pension pot to her daughter after she dies, but has had to change her plans since the Autumn Budget. Since the announcement that pensions would be liable for inheritance tax, she has started taking regular amounts from her pot to reduce its value and mitigate any future inheritance tax bill. 'I feel that I've worked hard to save money and I don't want it all taken away,' says Ms van Rossum, who retired ten years ago and lives in Fulham, west London. 'I'm not trying to avoid inheritance tax, but I want to be savvy about what I do.' She uses her annual £3,000 gifting allowance and also gives regular amounts to her family out of her surplus income. 'I really did my research first and I make sure to keep accurate records of any gifts,' she says. 'If you want to leave money you need to be really sure about what you're doing, and do your best to ensure that your family will get the best benefit from it.' You can make gifts out of income that you don't need so long as they are regular and come from income rather than assets.
