An increasing number of people are looking to gift their pension to their young relatives this Christmas ahead of a change to inheritance tax (IHT) rules.
The push towards financial gifting comes after Chancellor Rachel Reeves announced in the Budget that from April 2027, defined contribution (DC) pension pots will be included in the IHT net.
This means when someone dies, they can still pass on their money but their pension pot will be added to property and shares as part of potentially chargeable assets.
As a result, more parents, grandparents, and older relatives are looking to gift their retirement savings this Christmas to avoid these changes.
Financial advisors at Bestinvest, which is owned by wealth management firm Evelyn Partners, told The i Paper they have received a sharp increase in enquiries from existing and potential clients since the Budget relating to future IHT liabilities.
Ian Dyall, head of estate planning at Evelyn Partners, said: “Helping out loved-ones and seeing them enjoy greater financial security can bring a lot of joy and satisfaction to all concerned, at any time of year.
“Sharing wealth and supporting relatives financially has become more of a priority as demands have mounted on the budgets of students, young families and even middle-aged adult children.
“Another reason financial gifts could be top of the list for some families this Christmas, and in the coming years, is that older savers are looking to pass on more wealth before they die.
“The IHT rule changes announced in the Budget mean that more families will be drawn into the scope of inheritance tax in the coming years, and some of those will need to take steps shortly if they want to mitigate the effects.”
In the Budget, Reeves also froze the nil-rate bands for an extra two years, until April 2030, and reduced agricultural property relief and business property relief from 2026.
The first £1m of combined business and agricultural assets can still be passed on tax-free, but IHT will be levied at 20 per cent on the rest. A 20 per cent rate will also apply to AIM shares.
Rob Morgan, chief investment analyst at Charles Stanley, said it could make sense for people to think about reducing the size of their estate through allowable gifts and lifetime transfers this Christmas.
He said: “You must be careful though. Planning in this area is about striking the right balance between giving money away and making sure you’ll still have enough in later life.
“Christmas is the season of goodwill, and the holidays wouldn’t be complete without presents in a stocking or under the tree.
“But this year there may be added incentive for some parents and grandparents to make significant financial gifts to the next generation.”
How do inheritance tax nil-rate bands work?
IHT is usually paid at 40 per cent on the value of your estate not covered by available nil-rate bands.
In addition to the standard £325,000 band, there’s an additional allowance of up to £175,000 if you pass on your family home to children or grandchildren.
If you’re married or in a civil partnership, you can combine your allowance and transfer assets between each other free of the tax. This results in a potential £1m overall tax-free threshold per couple.
The nil-rate bands are now currently frozen until 2030, which means IHT is becoming more of an issue for many families even without the reforms to the regime outlined in the Budget.
It’s also important to note if your estate is worth more than £2m, the main residence nil-rate band reduced by £1 for every £2 over that level.
If your estate is worth more than £2.35m, the main residence nil-rate band is lost entirely.
Is it actually a good idea to make gifts to avoid IHT?
There are various ways you can go about gifting to avoid IHT, Mr Morgan said.
You can transfer money, investments or property to anyone with no immediate IHT to pay regardless of the value.
If you live for more than seven years, the gift will not be liable for IHT, and if you live for at least three years a sliding scale is applied.
The younger you are when you start gifting your wealth through these “potentially exempt transfers”, the more likely you are to live for a further seven years.
He added: “There’s also some useful annual gift allowances exempt from IHT, which may be useful to familiarise yourself with as the festive period approaches.
“Remember, if you decide to use some of these, keep a record of how much you gave, when you did, and to whom. This will simplify things for your executors.”
Below are a few ways on how to make gifts to avoid IHT:
- Charitable gifting
You can make unlimited transfers to any registered charity during your lifetime or after you die free of IHT. If your charitable legacy is 10 per cent or more of your estate after debts and bills have been paid, the IHT rate on the rest is reduced from 40 per cent to 36 per cent.
- Annual limit
You can give £3,000 a year free of IHT to one person or divide it between as many people as you wish. If you do not use the allowance in one tax year, you can carry it forward to the following tax year only.
- Small gifts
In addition to the £3,000 exemption, you can gift up to £250 per person to any number of people if the recipients have not received any gift within the £3,000 exemption.
- Wedding gifts
Wedding gifts made on or shortly before a marriage or civil partnership are exempt from IHT up to the following limits:
- £5,000 where the person making the gift is a parent
- £2,500 from a grandparent
- £1,000 for all others
- Gifts as part of normal spending
If you have money left at the end of every month, you can give this away without it being captured by IHT. There isn’t a limit on the number of gifts you can give under this exemption, but they must:
- Be made regularly
- Be from your surplus income
- Not mean you dip into your capital to maintain your usual standard of living
One way to take advantage of this rule and pass on your wealth to children and grandchildren is to arrange to fund contributions to ISAs, JISAs or SIPPs via direct debits.
However, you must keep good records of income and expenses that can be used when your estate is valued.
If you are unsure about whether to make financial gifts to loved ones this Christmas, taking expert financial advice can be a good idea.
'President Musk' is flexing his muscles and revealing how weak Trump is