A gifting rule used by only 2% of estates is set to see a spike in use, according to Quilter.
Freedom of information data from HM Revenue and Customs (HMRC), collected by Quilter showed just 1,490 estates have used the gifts out of surplus income gifting rule over the past three years for which data is available.
Quilter said it expects this figure to “increase significantly” owing to changes to the government’s plans to bring pension death benefits within inheritance tax (IHT). This would make this type of planning a “much more useful way to pass on wealth efficiently”.
IHT receipts are running at record levels and are set to increase further once the latest changes take effect next April, when unused pension wealth will become part of taxable estates, and therefore liable for IHT at 40%.
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Gifts out of surplus income do not require the donor to survive for seven years to escape IHT, as with standard gifting.
To qualify, the gifts must form part of the transferor’s normal expenditure, be made out of income, and left the transferor with enough income for them to maintain their normal standard of living.
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.
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“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,” Griffin continued.
“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.”
