During her first Budget as chancellor in October 2024, Rachel Reeves announced several changes to tax legislation that could affect your financial plan now and in the future.
Among the most notable were her proposals around the tax treatment of your pensions when you pass away. If the changes come into effect, your family could be more likely to pay Inheritance Tax (IHT) on any remaining pension savings you pass to them.
Fortunately, there are five useful gifting exemptions that could help you mitigate IHT.
Read on to learn more.
Your family could pay Inheritance Tax on any wealth that exceeds the “nil-rate bands”
When you pass away, the executor of your will calculates the total value of your taxable assets including your home and other properties, cash savings, investments, and valuable personal possessions.
IHT is typically due at a rate of 40% on any portion of your estate that exceeds certain thresholds called the “nil-rate bands”. The standard nil-rate band is currently set at £325,000. You may also benefit from up to an additional £175,000 “residence nil-rate band” when passing your main home to a direct descendant such as a child or grandchild.
Additionally, you can pass your entire estate to your spouse or civil partner without IHT, and they inherit your unused nil-rate bands. Consequently, you could pass on up to £1 million as a couple.
The chancellor announced in her Budget that the nil-rate bands would remain unchanged until April 2030.
Pensions may be liable for Inheritance Tax after April 2027
Pensions are typically exempt from IHT and don’t count towards the value of your estate for tax purposes. As such, they could be an effective tool for passing wealth to your loved ones tax-efficiently.
However, during her Budget, Rachel Reeves proposed that this exemption should end in April 2027.
In the future, the value of your taxable estate could be much higher as it will also include any remaining pension wealth. As a result, your family might be more likely to receive a significant IHT bill.
One way to potentially reduce the amount they pay is to take advantage of these five gifting rules.
1. Potentially exempt transfers
Wealth that you gift typically falls outside your estate for IHT purposes provided you live for seven years after giving them. This is known as the “seven-year rule”.
If you pass away within the seven-year window, the gift may become liable for IHT. The rate of IHT is calculated on a sliding scale based on how long you survive after giving the gift. This is known as “taper relief”.
The following table shows how much IHT may be due on PETs if you pass away within seven years:
The rules around PETs and taper relief can be complex, so you may want to seek professional advice before gifting wealth, to ensure you don’t accidentally trigger a tax charge.
2. The gifting annual exemption
While PETs only become IHT-free after seven years, some gifts immediately fall outside of your estate for IHT purposes if you take advantage of certain exemptions.
In 2024/25, and continuing in 2025/26, you have a “gifting annual exemption” of £3,000. This means that the first £3,000 you gift is free from IHT right away.
This gifting annual exemption is an individual allowance, meaning that a couple could pass on £6,000 IHT-free between them each year.
You can also both give an additional £5,000 to a child, £2,500 to a grandchild, and £1,000 to anybody else for a wedding or civil partnership.
Using the full gifting annual exemption each year could be a useful way to potentially mitigate IHT.
3. The “small gifts” rule
When transferring wealth to your loved ones, you could use the “small gifts” rule to pass lower sums to your beneficiaries.
This rule allows you to give an IHT-free gift of up to £250 to as many people as you like each year, provided you haven’t used any other gifting exemption on them.
4. The “gifts from surplus income” rule
The “gifts from surplus income” rule allows you to make regular payments to your beneficiaries, and those funds may fall outside your estate right away, without the need to wait for seven years. This is only the case if the payments meet certain criteria.
To be exempt from IHT, the payments must:
- Be regular
- Come from surplus income and not capital
- Not affect your standard of living.
You might make regular gifts from surplus income to help your loved ones manage rising living costs or contribute to their savings for the future, for example.
5. Charitable donations
While you may plan to leave most of your estate to your loved ones, you might want to support causes close to your heart too. Any charitable donations you make while alive, or when you pass away, immediately fall outside your estate for IHT purposes.
Further to this, if you leave at least 10% of your estate to charity, your beneficiaries could pay IHT at a reduced rate of 36% instead of 40%.
We can help you find the most tax-efficient ways to support a charity you care about and pass wealth to your loved ones when you’re gone.
Get in touch
If you want to explore how these gifting rules could help you reduce IHT, we can support you.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
The Financial Conduct Authority does not regulate estate planning or will writing.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
Approved by the Openwork Partnership on 24/03/2025
Production