Grieving families saved £27million in inheritance tax last year through a “much-overlooked” tax break, showing thousands more could be missing out on vital savings.
Only 270 families successfully claimed the gifting from surplus income exemption in the last tax year, which allows unlimited tax-free gifting.
Following the changes to inheritance tax announced in the Autumn Budget, financial gifts could be top of the list for some families this Christmas, and in the coming years as older savers are looking to pass on more wealth before they die.
Labour’s inheritance tax reforms are set to double the number of families affected by the levy by the end of the decade, so families are urged to look for ways to mitigate any loss they may face with effective estate planning.
To qualify for the “much overlooked” exemption, gifts must come from surplus income, and donors must prove they maintained their normal standard of living after making the gift.
Ian Dyall, head of Estate Planning at Evelyn Partners, explained that regular gifts made by people with more income than they need may benefit from the “normal expenditure from income exemption”.
He said: “This is a much-overlooked option for transferring wealth tax-efficiently.”
Many donors choose to give regular amounts to young relatives, often through Junior ISAs, pensions or trusts. However, to be inheritance tax efficient, these gifts must meet specific criteria.
Dyall continues: “To qualify, the gifts must be regular in nature, made from income rather than capital, and cannot affect the donor’s standard of living.
“If it looks like their estate will be subject to inheritance tax, a sensible option for some can be to give away assets while they are still alive.”
Only 270 families successfully claimed the normal expenditure out of income exemption in the last tax year, which allows unlimited tax-free gifting.
The figures, obtained from The Telegraph through a Freedom of Information request, show a 40 per cent decrease in successful claims compared to 2022. Over the past six years, just 2,760 families have benefited from this exemption, saving a total of £331million in inheritance tax.
This approach could save beneficiaries from a potential 40 per cent charge on taxable assets at death.
Dyall highlighted that gifting will become increasingly attractive as inheritance tax rules change, particularly for those with large defined contribution pension pots.
However, he warns that careful consideration is needed before starting any gifting strategy.
He said: “Before anyone starts giving money away for this reason they should take advice or do their homework on what exemptions they are entitled to, and therefore what the IHT liability is likely to be.”
To make a claim, the family must fill in the IHT403 form, where they will have to note their late loved one’s income, expenditure and the gifts made out of surplus income.
But to avoid having a claim rejected, families must be able to show that the gifts were “normal” and therefore show a regular pattern of payments rather than an exceptional amount that was out of the ordinary.
In the Autumn Budget, Chancellor Rachel Reeves announced plans to make pensions subject to inheritance tax at 40 per cent, while also freezing the tax threshold.
The Office for Budget Responsibility forecasts an 85 per cent rise in inheritance tax receipts to the Treasury as a result. Total tax paid is expected to increase from £7.5billion to £13.9billion, with £2.3billion coming from Reeves’s changes alone.
An additional 1.5 per cent of total UK deaths will become liable to pay inheritance tax, affecting 10,500 estates with inheritable pension wealth in 2027/28.
Furthermore, 38,500 estates will pay an average £34,000 in additional inheritance tax due to pension assets being included in estate values. The changes also include reductions to agricultural property relief and business property relief from 2026.