Older savers are gifting money to their children and grandchildren in response to the plans to include pensions in inheritance tax calculations, new data indicates.
Last autumn, the Government announced that from April 2027, the majority of unused pension funds and death benefits will be included in the value of an individual’s estate for IHT purposes.
A survey by Paragon Bank reveals 17 per cent of 1,385 active savers over the age of 65 have started to gift money because of the IHT changes, with a quarter increasing the amount they give.
Gifting: Families are giving money to their direct family to avoid hefty IHT billsÂ
The majority of gifts are given to immediate family, with 71 per cent of the savers surveyed giving to children and 46 per cent to grandchildren.Â
Meanwhile, 15 per cent made charitable donations, but this outpaced gifts to friends (5 per cent).
Gifts are a simple way for individuals to reduce their inheritance tax bill, as they become exempt if the recipient lives for at least seven years.
Current gifting rules allow people to gift £3,000 a year, plus unlimited small gifts of up to £250, which are free from inheritance tax. If you die before the seven years are up, IHT is levied on a sliding scale, and individuals have to pay the full 40 per cent if it’s within the first three years.
Two in five savers who gift money plan to give up to £3,000 this year, according to Paragon’s survey, with a further 19 per cent intending to give between £3,000 and £10,000.
Andrew Wright, head of savings at Paragon, said: ‘Savers who plan to give cash to loved ones should ensure their money is working hard for them in the meantime, earning a competitive rate of return.
‘But it’s equally important to retain sufficient funds for their own future needs and gifting should be part of a balanced financial plan.’
The number of families paying inheritance tax is expected to rise due to frozen thresholds, higher property prices and the upcoming pension changes.
Figures published today show IHT liabilities rose 12 per cent to £6.7billion for the 2022/23 tax year, with the total number of deaths resulting in the levy increasing 13 per cent to 31,500.
These figures show that more families are incurring IHT liabilities even before the pension changes, which come into force in 2027.
The Office for Budget Responsibility forecasts liabilities 2024/25 will rise to £8.4billion, while the current tax year is expected to raise £9.1billion.
Ian Dyall, head of estate planning at Evelyn Partners says: ‘What these lagged annual liability figures do give us is some granular detail on how IHT is distributed and what reliefs are being used.Â
‘First, while many more households are being drawn into the IHT net, it remains the case that the bulk of liabilities tend to be fairly concentrated among a small number of large estates.Â
‘About 6,400 families with net wealth greater than £1.5million paid £4.3billion in IHT – or 64 per cent of the total.
‘Families with that level of wealth tend not to garner much sympathy but the Treasury cannot sustainably prop up the public finances by taxing the wealthiest 1 or 2 per cent forever without consequence.
‘The danger with seeking further taxation of wealth at the next Budget – whether that is via capital gains tax, inheritance tax or some other mechanism – is that such households, which are often wealth and business creators in themselves and quite mobile, could get fed up and leave the country.’
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One in five over 65s now gifting money to family in response to Chancellor’s inheritance tax raid