Strategies for safeguarding your pension from Labour's inheritance tax grab
Getting Ahead of Inheritance Tax with Surplus Income Gifting
It's high time to reconsider your strategy when it comes to inheritance tax (IHT). According to Quilter's latest analysis, a mere 2% of estates paying IHT are currently leveraging surplus income gifting to lower their tax obligations. However, this situation is set to change potential tax hikes and changes coming April 2027.
Using the freedom of information (FOI) requests, Quilter discovered that only 1,490 estates are taking advantage of the surplus income gifting rules at present. But with upcoming inheritance tax increases and changes, Quilter anticipates a surge in the use of this method.
So, what's all this about surplus income gifting? Simply put, money can become tax-exempt if regular gifts are made from income, even if the donor passes away within seven years of the transfers. To qualify, you need to abide by a few key conditions, particularly in the regularity of the payments.
Navigating IHT Records
HMRC imposes strict rules regarding record-keeping, so it's essential to have solid proof that the income is genuinely surplus and doesn't affect the donor's standard of living. Your documentation should detail the income and expenses involved, as well as the amount gifted and the timeline. To secure the exemption, transfers should be made consistently, not as a one-time substantial sum.
Rachael Griffin, a tax and financial planning expert at Quilter, shared her insights: "Fewer than 1,500 estates have utilized this exemption in the past three years, making it one of the most underestimated IHT reliefs. With upcoming pension tax modifications in 2027, we predict a dramatic increase in the use of this exemption as more people look for ways to minimize IHT liabilities."
Griffin continued, "For those who can afford to make gifts from surplus income, this is a golden strategy, as the exemption applies immediately without needing to wait seven years - a requirement for most other gifts over the £3,000 annual exemption."
However, Griffin emphasizes the importance of good record-keeping. "Accurate documentation demonstrating that gifts came from surplus income, rather than capital, and did not impact the donor's standard of living, is crucial to secure the exemption. Seeking financial advice can help ensure compliance and maximize the benefits of this often overlooked exemption."
Remember, a little planning and documentation can go a long way in cutting your inheritance tax bill significantly. So, dig into your finances, create a strategy, and keep meticulous records to ensure compliance and reap the benefits of this overlooked exemption.
- To minimize inheritance tax liabilities, consider using surplus income gifting as an underestimated relief, especially with upcoming changes in pension tax.
- Proper documentation is crucial when gifting surplus income, as it demonstrates that the income is genuinely surplus and doesn't affect the donor's standard of living.
- HMRC's strict rules require detailed records of income, expenses, gifted amount, and timeline for gift transfers to secure the exemption.
- For those who can afford regular gifts from surplus income, this strategy offers an immediate exemption from inheritance tax, unlike most other gifts over the annual exemption.
- Seeking financial advice can help ensure compliance with HMRC rules, maximize the benefits of the surplus income gifting exemption, and potentially lower your inheritance tax bill.
