By James Kenward; Independent Financial Adviser
For wealthier individuals, pensions have traditionally been the last asset accessed due to their inheritance tax (IHT) efficiency. If recent proposed changes go ahead, the impact will vary – those using pensions mainly for retirement income may need tweaks, while those intending to pass on wealth may require more significant changes and a new approach.
One of the most underused IHT exemptions is gifting from surplus income. Unlike other gifts, which may be subject to the seven-year rule, gifts from excess income can be immediately outside the donor’s estate – provided certain conditions are met.
To qualify, gifts must:
- Come from surplus income (not capital, such as savings and investments) after tax. E.g. pension income, interest from savings, dividends, income payment received from a trust, rental income or income from ISAs.
- Be part of a regular pattern of giving.
- Not affect the donor’s standard of living.
Record-keeping is crucial so document income and expenses carefully to prove availability of excess income for gifting. A history of similar gifts over three to four years will suffice, though a single gift may qualify if intended to be the first of a pattern.
Beyond surplus income, other IHT gift exemptions include:
• £3,000 annual gifting allowance (£6,000 if unused from the previous
• Small gifts of E250 to multiple individuals.
• One-off gifts for weddings or civil partnerships.
Additionally, a surviving spouse who inherits a pension from a partner who died before age 75 may consider withdrawing larger amounts tax-free and gifting them, hoping to survive seven years so they fall outside their estate.
What next? Some may prefer to wait for clarity on the proposed changes before making major decisions, but those with specific circumstances might benefit from starting their planning sooner.
To book a complimentary inheritance tax review with one of our independent financial advisers, get in touch today by calling 0117 3636 212 or emailing office@haroldstephens.co.uk.
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