I'm giving my pension away to my daughters as surplus income to cut inheritance tax - here's how

Daily Mail​

3 days ago

Inheritance tax has become an even hotter topic in recent times when it comes to our personal finances and financial planning.
With an increasing number of estates set to be dragged into the inheritance tax net in coming years, more people will need to take action to mitigate the eventual tax bill.
One way to do this is to make use of gifting out of surplus income, officially known as 'normal expenditure out of income'.
This useful exemption is becoming more popular with those looking to slash the IHT bill levied on their estates, especially as it means the money given away becomes free from IHT immediately, and is not subject to the seven year gifting rule that many are caught out by.
Gifting out of surplus income allows you to pass on wealth free from tax provided that it forms part of a regular 'pattern of giving'.
However, failing to properly record these regular gifts could see you fall foul the rules. As a result, it is important to ensure that the gifts come out of your income rather than capital, and form a regular pattern.
Below, one This is Money reader, Dave Oram, 59, explains how he is using gifting out of surplus income to pass his wealth to his two daughters, and how you can do the same.
'Every pound I can pay my daughters legally now is going to be worth a pound rather than 60p,' Dave Oram says.
'I just want to pay as much money to them now so that I can help them and they have to pay less of it in tax to the Government.'
The savvy 59-year-old plans to use gifting out of surplus income in order to pass his wealth on to his two daughters, both of whom have moved out of his home in south London.
Oram previously worked in payment systems at NatWest, taking voluntary redundancy in 2021.
When the Chancellor, Rachel Reeves, announced pensions would cease to be free from inheritance tax from 2027, Oram realised that his self-invested personal pension (Sipp) was at risk and that he might not be able to pass as much of his wealth to his children as he hoped.
That was when he came across gifting out of surplus income, and discovered that it could be the perfect solution to help him secure his children's futures.
'I didn't set up a self-invested personal pension to avoid inheritance tax,' Oram said, 'I just got it in order to be able to retire earlier not pay the penalties for withdrawing my defined benefit pension early.
'Then my mum died, and I got an inheritance from her.'
'I've got a lot of money. I've got a lot of savings. Even before my mum died, I had a lot of savings and my house is worth a lot of money, so I knew I'd be hit for inheritance tax.'
Having inherited money from his mother, Oram initially planned to leave his Sipp to his two daughters as a way to mitigate his future tax bill – a plan that was scuppered by the Autumn Budget changes.
He said: 'I started looking into how I could avoid paying inheritance tax, and gifting. I was already using the £3,000 gifting allowance each year.'
Oram added: 'I won't avoid inheritance tax, but I will at least mitigate it.'
Oram told This is Money: 'The Government site is pretty poor on what counts as disposable income.
'There's no formula… it has to be regular payment. It cannot be the odd payment here and there. It has to be regular, which I've deemed to be monthly.
Oram's plans are in place – upon drawing his defined benefit pension in May 2025, he has started to gift money to his daughters each month, satisfying the requirement for gifts to be regular and consistent, and also not hitting his standard of living.
He said: 'It has to be regular outgoings, like utilities, food, those kinds of things. That's what I'm basing on. So I know how much I spend every year. I know what my pension income will be every year.'
Oram plans to divide the money equally between his two daughters, 'I'm in a position where I have got a significant amount of savings. So I can give as much of my income as I can to my girls now, which is quite useful for them.'
He told This is Money: 'I've explained to them that I can pay them money and that I'll be paying them an equal amount to go towards their rent.'
'They're just very happy that I can pay some money monthly.'
Oram added: 'My youngest, who got married last year, is renting, and they want to buy.
'This will help them. I will be paying them quite a bit of money, which means I can just save that and put into their pot for deposit.'
With pensions set to be drawn into the inheritance tax net, and the IHT threshold being frozen until 2030, an increasing number of people will start paying inheritance tax on their estates.
Oram said: 'I'm totally against inheritance tax. I think it's wrong. I certainly I think it's wrong for everyone, even if you've got loads of assets and you're really super well off. I still think it's wrong, because if you've been paying your taxes, I don't see why on death you should have to pay in inheritance tax.'
'A lot of people think 'tax the wealthy', not realising that they'll probably be taxed as well, because most of them haven't got a clue how inheritance tax works.'
He added: 'Their view is, 'it won't affect me', but it will affect them. Of course, those people are the ones who end up paying more because they're not going to mitigate it.'
Inheritance tax receipts reached £8.2billion between April 2024 and March this year, another record high and an increase of £800million compared with the same period last year.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown, said: 'A mixture of frozen tax thresholds and rising asset values drag more families into the net.
'The recent government announcement that pensions will be made subject to inheritance tax from April 2027 will act as a further warning to families that they need to be prepared.'
What is gifting out of surplus income?
Gifting out of surplus income, as mentioned above, allows you to pass on wealth without incurring a tax bill.
To qualify for this, the gifts must form part of a 'pattern of giving' that can be backed up with records.
Obviously, this pattern has to start somewhere, so a gift that proved to form part of a commitment to create a pattern also qualifies.
Alongside this, these gifts must be from income that is surplus to your needs, this means that giving the gifts must not impact your standard of living in any way.
Gifts must also be made from income, rather than capital – this means that savings and investments can't be the source of the funds gifted.
However, there are other stipulations that you need to be aware of, so it is important to do your research before taking any action and it is advisable to speak to a qualified independent financial adviser.