Retirees are told to make regular cash gifts to their children and in some cases cutting their HMRC future inheritance tax bill.
State pensioners told to ‘make gift’ or risk being punished by HMRC
An inheritance tax loophole will let state pensioners pass on money tax-free. Retirees are told to make regular cash gifts to their children and in some cases cutting their HMRC future inheritance tax bill.
Older people are no longer taking all of their 25 per cent tax-free pension lump sum in one go, tax experts have said. These payments are then passed on to children or grandchildren as “surplus income”.
Under HMRC guidance, gifts made out of surplus income are exempt from the 40 per cent tax charged on estates above £325,000. These payments do not fall under the usual seven-year rule meaning the money escapes tax straight away.
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That is as long as the person giving it away can prove it came from income and that they still have enough left to maintain their usual standard of living.
Nick Nesbitt, head of private client at Forvis Mazars, stated: “There is a growing view that pension tax-free cash can be classed as income for gifting purposes, if taken gradually over time.”
Eamonn Prendergast, chartered financial planner at Palantir Financial Planning, said: “I’ve definitely seen an uptick in this, particularly among higher-net-worth clients. It’s not just from tax-free cash, but from other pension withdrawals and forms of income too.”
He explained that successful implementation requires “the gifting has to be regular, sustainable, and not impact your standard of living, otherwise HMRC are likely to challenge it.”
“In theory, this means you can pass your tax-free cash on completely tax-free but HMRC hasn’t clarified this position yet,” Mr Nesbitt explained.
Mr Prendergast said: “Until HMRC provides proper clarity, this area will remain risky, but for clients who can afford it and keep thorough records, it can still be a valuable planning tool.”
Zoë Dagless, director at Meliora Financial Planning, said: “I find this area particularly grey. Personally, I would err on the side of caution and say it’s unlikely [to be considered income for gifting purposes].”
“Record-keeping is absolutely key; if clients can’t clearly show a pattern and that the gifts are genuinely from surplus income, it will be difficult to defend later,” Mr Prendergast warned.
Ms Dagless said: “I’d certainly welcome greater clarity from HMRC on what constitutes ‘gifting out of income,’ so the rules are more transparent and easier for clients to understand.”