| Pensions set to be drawn into the Inheritance Tax (IHT) net from 2027 | Gifting can be one of the most powerful tools for reducing liability | Larger gifts (PETs) fall outside IHT if you live for seven years after making them |
With pensions set to be drawn into the IHT net from 2027, effective planning has never been more important. Gifting can be one of the most powerful tools for reducing liability – but when handled incorrectly, it can undermine the benefit entirely.
Making gifts work
Certain gifts are exempt immediately, such as the £3,000 annual allowance or small gifts under £250. Larger gifts, known as Potentially Exempt Transfers (PETs), fall outside IHT if you live for seven years after making them. Regular gifts from surplus income can also be exempt, provided they don’t reduce your standard of living and are carefully recorded. Good record-keeping should capture what was given, when, to whom, the value at the time, the source of funds and evidence that your living standards were not affected. This could include bank statements, written notes, valuations and a simple spreadsheet. Without a clear paper trail, HMRC may challenge the exemption.
Common mistakes to avoid
One of the biggest traps is the ‘gift with reservation of benefit’ – where you give something away but continue to use it. A typical example would be transferring a holiday home to your children but continuing to use it rent-free. In such cases, the asset remains part of your estate for IHT, potentially leading to unexpected bills.
Keeping control of your legacy
With frozen thresholds and pensions joining the IHT framework, there is little room for error. We also have the budget coming up, so changes may be announced then, although they will be unlikely to be effective immediately. Reviewing your plans now can help ensure your gifts achieve their purpose – protecting family wealth and passing it on as intended.
It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored advice and is for guidance only. Some rules may vary in different parts of the UK.
