Inheritance tax update: Brits urged to take advantage of 'underutilised' IHT relief before pension raid hits
An inheritance tax (IHT) exemption that could save families thousands of pounds is being used by fewer than two per cent of estates, new data has revealed.Freedom of information (FOI) figures obtained by wealth manager Quilter show just 1,490 estates have utilised the "gifts out of surplus income" rule over the past three years.When these conditions are met, the gift immediately becomes exempt from inheritance tax. This makes it particularly attractive for those looking to pass on wealth efficiently without waiting periods.The strategy is set to become even more valuable from April 2027, when significant changes to pension taxation will take effect.Britons are not taking advantage of inheritance tax relief GETTY Currently, unused pension funds sit outside the inheritance tax net, allowing them to be passed on tax-free once someone has passed away.However, from 2027, pension wealth will become part of the taxable estate, potentially subjecting it to 40 per cent inheritance tax on amounts exceeding the nil-rate band.This major shift is forcing many to reconsider their estate planning approaches.For those with sufficient income, the gifts out of surplus income exemption could provide a crucial way to mitigate these new tax liabilities.Despite the exemption's advantages, detailed record-keeping is essential for HMRC compliance. Those claiming the exemption must provide clear evidence that gifts came from surplus income rather than capital.Do you have a money story you’d like to share? Get in touch by emailing money@gbnews.uk.Inheritance tax receipts are rising every year GETTYThey must also prove the donor maintained their usual standard of living while making the gifts. HMRC requires documentation showing a pattern of regular gifting, rather than one-off lump sums.This administrative burden likely contributes to the low uptake of this valuable exemption. Without proper documentation, HMRC may reject claims for the relief, potentially resulting in unexpected tax bills for beneficiaries.Rachael Griffin, tax and financial planning expert at Quilter, broke down why families are at risk of missing out by not taking advantage of available support.She 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."She emphasised that the relief applies immediately without the seven-year waiting period required for most other gifts above the £3,000 annual exemption.LATEST DEVELOPMENTS:The tax changes involve new restrictions on inheritance tax relief for agricultural land and property, and family-run businessesGBNEWS/GETTY"Good record-keeping is absolutely essential," Griffin added. "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."For those who can afford to make gifts from surplus income, this strategy offers significant value.With inheritance tax receipts at record highs, this exemption provides a timely opportunity for tax-efficient wealth transfer.Seeking financial advice can help ensure compliance and maximise the benefits of this overlooked exemption, according to Quilter's analysts.
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