How to shield your pension from Labour’s inheritance tax raid
According to new analysis by Quilter, just two per cent of estates subject to inheritance tax (IHT) are currently taking advantage of surplus income gifting to reduce their tax liabilities.
Based on freedom of information (FOI) requests carried out by the wealth management firm, just 1,490 estates are currently taking advantage of the rules, but Quilter expects that their use will boom following inheritance tax hikes and tax changes coming in from April 2027.
Money can be exempt from inheritance tax if regular gifts are made from income, even if the giver dies within seven years of the transfers taking place.
Some key conditions need to be met to secure the exemption, particularly in the regularity of the payments.
IHT records
HMRC imposes strict rules around record-keeping, with clear documentation needed to prove that the income is genuinely surplus – and does not impact the donor’s standard of living.
The documentation must detail the extent of the income and expenses involved, as well as how much is gifted and when.
To secure the exemption, the transfers must be made at regular intervals, not just as a one-off lump sum.
Rachael Griffin, tax and financial planning expert at Quilter, said: “With just 1,490 estates making use of this exemption in the past three years, it remains one of the most effective yet underutilised IHT reliefs available.
“Given the upcoming pension tax changes in 2027, we expect to see a sharp increase in the use of this exemption as more people look for ways to mitigate IHT liabilities.
“For those who can afford to make gifts from surplus income, this is an incredibly valuable strategy, as the relief applies immediately without needing to wait seven years, which is required for most other gifts above the £3,000 annual exemption,” added Griffin.
“However, good record-keeping is absolutely essential. HMRC requires clear documentation proving that gifts were made from surplus income rather than capital, and that they do not reduce the donor’s standard of living.
“Seeking financial advice can help ensure compliance and maximise the benefits of this overlooked exemption.”