Families race to transfer cash to kids ahead of inheritance tax reforms
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 Experts said the unpublished current figure was likely to be higher as estate owners looked to reduce their liabilities ahead of Rachel Reeves's imminent inheritance tax reforms.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.
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