The longstanding £3,000 gifting allowance for children, an important aspect of inheritance tax (IHT) planning, is under the spotlight as new reforms are anticipated under Labour leader Andy Burnham’s upcoming premiership.
BBC Money Box presenter Paul Lewis recently explained these inheritance tax changes, highlighting why millions are concerned. “Inheritance tax is probably the most disliked tax, even though 19 out of 20 estates actually don’t pay it,” he noted. However, the threshold for IHT, currently set at £325,000, has been frozen since 2009. Beginning in April 2027, pension funds left behind will also be counted as part of taxable estates, potentially increasing the number of individuals subject to IHT.
Given these changes, many will seek ways to reduce their taxable estate. A common strategy recommended by experts, including Lewis, is to gift money during one’s lifetime or spend it. Supporting this approach, new research from The Private Office, a firm of independent financial advisors, found that over 80% of their middle-aged and older clients believe wealth should be passed down before death.
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With Andy Burnham set to succeed Sir Keir Starmer as Prime Minister next April—having ruled out an early election—these reforms are expected to be enacted during his tenure.
Listeners have raised practical questions about gifting limits. One listener, Simon, asked about giving £13,000 in one year, exceeding the £3,000 annual exemption by £10,000, and how this would be taxed if he passed away shortly afterward. Would HMRC charge 40% on the £10,000 immediately, or would it be added to the estate before taxation?
David Dodgson, another expert contributor on Money Box, clarified that gifting over the annual exemption is not immediately taxed. He emphasized the importance of understanding available IHT exemptions—such as the £5,000 wedding gift exemption for children, which can be given without tax consequences.
Paul Lewis elaborated that the £3,000 annual gifting limit applies per individual, meaning married couples effectively have a combined £6,000 exemption, with the potential to carry forward any unused allowance from the previous year. This means in certain cases, couples could gift up to £12,000 tax-free if they had not used their allowance the year before.
Dodgson also highlighted the significance of regular gifts out of surplus income—gifts made consistently from income exceeding living expenses that can be shown through documentation. These do not form part of the taxable estate upon death and provide a valuable way to reduce IHT liability.
The looming inclusion of pensions into the IHT net in 2027 has triggered increased attention toward gifting strategies. Dodgson advised that individuals proactively gifting away parts of their pension or other assets during their lifetime may reduce the inheritance tax burden on their heirs.
As these reforms approach, understanding and utilizing gifting exemptions and allowances will be essential tools for many families aiming to protect their wealth and minimize tax impacts.