Affluent families are increasing the frequency and timing of financial gifts to their loved ones as a measure to circumvent anticipated inheritance tax changes on pensions set to take effect in spring 2027. A survey indicates that nearly two-thirds of individuals with incomes exceeding £100,000, investable assets of £500,000 or more, or property valued above £1 million, are aware of and concerned about these impending tax alterations.
Approximately 30 percent of these individuals are already modifying their gifting behaviors. Among those opting for greater generosity, 47 percent are gifting more often, 44 percent are gifting earlier, 35 percent are giving larger sums, and 7 percent are broadening the circle of recipients, according to research by RBC Brewin Dolphin.
The UK government plans to apply inheritance tax to pensions starting in April 2027, aligning them with existing taxes on property, investments, and savings. Inheritance tax is currently levied at 40 percent on estates exceeding specific thresholds, which are £325,000 for single individuals and £650,000 for married couples or civil partners. These thresholds increase to £500,000 and £1 million, respectively, when passing a home to direct descendants.
Families are utilizing various methods to reduce their inheritance tax liability. While nearly half of those surveyed are not making gifts for a specific purpose, others are funding house deposits, providing day-to-day financial support, contributing to shared experiences, or covering educational expenses like school or university fees.
Several gifting avenues exist to mitigate inheritance tax. Individuals can gift £3,000 annually and make unlimited small gifts of up to £250 without incurring tax. Spouses and civil partners can exchange unlimited sums tax-free, provided they reside in the UK. Wedding gifts are also exempt, with limits varying based on the relationship to the couple, up to £5,000 for a child, £2,500 for a grandchild, and £1,000 for others.
A less commonly known method involves contributing to an individual's living costs, provided these gifts are made from surplus income and can be substantiated. These contributions may require beneficiaries to present bank statements to demonstrate that the donor did not require the funds for their own expenses.
Larger sums can be gifted, but these fall under the seven-year rule. Such 'potentially exempt transfer' gifts become fully exempt from inheritance tax if the donor survives for seven years. If the donor dies within this period, inheritance tax is applied on a sliding scale, starting at 40 percent within the first three years and decreasing to 8 percent between six and seven years. Gifts made seven years or more before death are tax-free.
Michelle Holgate, a director and wealth manager at RBC Brewin Dolphin, highlighted the significant impact of the 2027 changes on pension estate planning. She noted that an increasing number of individuals might find themselves subject to inheritance tax for the first time, often without realizing it. Holgate advised proactive planning and open communication with families well in advance of the changes to manage expectations and optimize wealth transfer.