An inheritance tax (IHT) rule could enable families to pass on more wealth instead of paying the Labour government. Starting 6 April 2027, pensions will no longer be exempt from inheritance tax. Many individuals are now reconsidering how to manage their pensions for efficient wealth transfer.
Gifting Rules Remain Unchanged
From an IHT perspective, the normal exemptions for gifts remain unchanged. Gifts of cash qualify as a 'potentially exempt transfer' (PET), meaning no IHT is payable if the donor survives seven years after making the gift.
If the donor dies within seven years, the PET is brought back into the estate for IHT purposes. The nil rate band (and spousal nil rate band if applicable) is applied first against lifetime gifts. Consequently, any IHT due on PETs is effectively passed to the death estate, where a 40% rate applies.
Only when lifetime gifts exceed the nil rate bands does the recipient become liable for IHT, and a lower tapered rate may apply if the donor survived at least three years.
Regular Gifts from Income
Regular gifts made from surplus income are exempt from IHT both at the time of the gift and upon death. This applies if you have excess income each year after living expenses and make consistent gifts from that surplus. However, this relief may not apply in all circumstances.
Other fixed-sum IHT exemptions may also be available depending on the gift's purpose, such as the annual allowance (£3,000), marriage gifts (£1,000 to £5,000), and small gifts (£250).
Strategic Advice from Experts
BDO explains: 'You might consider making gifts out of non-pension assets. You can then make larger withdrawals from your pension to fund your retirement in the usual way. Such gifts would be a Potentially Exempt Transfer, and IHT free if you survive 7 years.'
'And, providing you survive at least 3 years, even if such gifts are chargeable, the rate of IHT payable might be reduced.'
Note that income tax will be payable on any additional pension withdrawals you take.
