The UK government is reportedly reconsidering a rarely used HMRC exemption that allows households to gift unlimited amounts from surplus income to family members tax‑free, provided the donor maintains their usual standard of living.
As concerns mount, experts urge careful documentation and strategic planning to navigate possible changes.
What Is the Current HMRC Rule?
Under existing regulations, individuals can make regular gifts from surplus income (like pension, rental, or dividend income) to family without paying Inheritance Tax (IHT)—as long as:
- The gifts form part of normal expenditure
- They’re made from after‑tax income, not capital
- The donor retains enough income to maintain their lifestyle
There’s currently no cap on how much can be gifted using this exemption. It bypasses the 7‑year rule, providing immediate IHT relief.
Why the Rule May Be Changing
Proposals under consideration by the Chancellor include:
- Capping the value of lifetime gifts that are IHT‑free
- Modifying or scrapping the 7‑year rule for inheritance planning
- Potentially eliminating the surplus‑income gifting exemption altogether
These changes are seen as a response to rising IHT revenues—currently at record highs—with projections that family asset transfers will face greater scrutiny.
Key Data & Figures
Aspect | Current Rule | Potential Changes |
---|---|---|
Surplus‑income gifting | Unlimited, tax‑free if conditions met | May be capped or eliminated |
7‑Year Rule (PETs) | IHT-free if donor survives 7+ years | Could be reduced in duration or removed entirely |
Annual Gift Allowance | £3,000 per year (carry forward possible) | Likely to remain, but used more heavily under changes |
IHT Receipts Trend | IHT receipts rising sharply (£8.25bn+ in 2024–25) | Increases due to frozen thresholds and pension inclusion |
Usage of Surplus Income Gifts | Extremely underused—only ~430 claims (2022–23) | Could diminish further if rule is under threat |
Implications of the Rule Change
- Reduced Estate Planning Flexibility
Surplus‑income gifting provides a powerful tool to pass on wealth free of IHT—without the need for seven-year waits. Altering or removing it would limit sophisticated tax planning options. - Increased IHT Burden
With property and pension values escalating, removing this exemption may expose more middle-income households to hefty IHT liabilities. - Need for Alternative Strategies
Expect a surge in demand for trusts, life insurance trusts, or other mechanisms to safeguard inheritances and navigate tighter rules effectively. Accurate record‑keeping will become even more vital.
A potential HMRC crackdown on the tax-free surplus-income gifting rule could significantly tighten the estate planning landscape.
While the exemption currently offers families a strategic way to reduce IHT immediately, policymakers are reportedly eyeing reforms that could restrict or abolish it.
In this shifting environment, proactive planning, sound documentation, and expert financial advice will be crucial for those wishing to protect legacy wealth.
FAQs
Surplus income includes regular post-tax income sources (like pensions, rentals, savings interest) beyond essential living costs. It must not reduce the donor’s living standard.
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