Inheritance tax liabilities rose to their highest level on record one month ahead of the end of the tax year, driven frozen tax thresholds and rising property values.
HM Revenue & Customs recorded £7.6bn in IHT receipts in the first 11 months of 2024-25, exceeding the full-year total of £7.5bn for 2023-24.
The news come as financial planners encourage consumers to take advantage of their gift allowance to get ahead of changes to inheritance tax in the coming years.
Reforms announced in last year’s Budget mean pensions will become subject to IHT from April 2027, affecting people who had spent years building retirement pots under the assumption that they would be passed on free of tax.
Inheritance tax is paid on estates that exceed a £325,000 nil-rate band, which can rise to £500,000 if a property is passed on. The tax-free allowance rises to a combined total of up to £1mn for married couples and civil partners.
As more people start to become liable for IHT, there is a renewed emphasis on gifting to reduce your tax burden.
“One of the best ways to cut the amount of tax you have to pay is to make gifts during your lifetime,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. “However, if you’re going to make gifts without causing headaches for your family, you need to understand the rules and how to work with them.”
You can give away any amount of money you like free of IHT, providing you live for seven years after gifting and receive no benefit from the gift yourself.
Aside from that, you can give away up to £3,000 each year under your annual gift allowance, known as your “annual exemption”. Any unused allowance can be carried forward for a single tax year, meaning that if you didn’t gift at all last year, you could have up to £6,000 at your disposal. Couples can take advantage of each of their allowances to gift up to £12,000.
If you’d like to give more though and avoid the “seven-year rule” there are other ways of giving that are exempt of IHT. The main way is through surplus income. Crucially, this must be taken from your regular monthly income, and you must also be able to afford the payments after meeting your usual living costs.
It is important to keep records to show HM Revenue & Customs that these conditions have been satisfied. Petronella West, chief executive of wealth manager Investment Quorum, says she encourages her clients to fill out the IHT403 form themselves, which beneficiaries of inheritances complete to record gifts made by the deceased.
“If you actually fill it in yourself, it will give you a really clear picture of what you can afford to give away, so you don’t fall foul of the rules,” she says.
One way to gift out of surplus income, says Coles, is to help with children or grandchildren’s monthly mortgage payments. This establishes “regular gifts, which fall out of your estate immediately and could make property ownership manageable for another generation.”
Those without enough surplus income to gift regularly could invest in income-yielding assets, and give away the additional money they receive.
West observes that those who buy funds will need to opt for “income units”, not “accumulation units” to benefit from IHT exemptions. “Always make sure that you’re harvesting an income, or [in the case of bond funds] the coupon. If you instead choose accumulation units, all your income will be reinvested and you won’t receive the regular cash payments you need to gift out of surplus income.”
Coles suggests purchasing a 100 per cent joint-life annuity, a pension product that will pay a retirement income to the policyholder and a surviving spouse.
“You can use the income to fund premiums for a whole-of-life insurance policy (joint life, second death), set up in trust so it pays outside your estate on death,” says Coles.
The money spent on the annuity is removed from your estate immediately, she explains. “But if you died the next day your beneficiaries would get the whole-of-life (insurance) payout tax free.”
“The two products can’t be linked if they’re going to work within the rules, so you might want to get advice to make sure you stay on track.”
The strategy could start “as young as your mid to late 50s”, says Coles — depending on the state of your health. “It’s a balance between the cost of insurance [which is cheaper for those in good health] and the value of your annuity [which pays out more in poor health].”
Another option for those whose offspring are getting married is to utilise the separate gifting allowance for weddings and civil partnerships. Children can be given up to £5,000, grandchildren and great-grandchildren are allowed up to £2,500, and anyone else can be gifted £1,000 free of tax.
Many people opt to give away their homes, hoping that they can take advantage of the seven-year rule, but often fall into a common trap.
“If you get any benefit from [the property], then . . . it’s not counted as having been given away at all,” says Coles. “This can happen if you continue to live there without paying a market rent, if you give it away with conditions attached — like them not being able to sell.” Under such circumstances, “you could pay all the legal costs for a transfer and not get any tax benefit from it at all”.
Should you take money out of your pension to shield it from the upcoming IHT changes?
Ollie Saiman, co-founder of wealth manager Six Degrees, says that an increasing number of his clients have discussed taking their 25 per cent tax-free lump sum earlier in light of the changes — typically to spend or gift.
If you plan on investing the money though, “it might as well remain within the pensions wrapper,” he says. “It won’t make a difference from an IHT perspective whether it stays in or out.” By keeping it in your pension, you can take advantage of tax relief on the growth of your pot, he adds.
It’s never too early to start thinking about gifting, says West. “The success of all of this is about having a long-term financial plan — [giving] little and often works well.”
