Lifetime Giving and Inheritance Tax Planning: Is Now the Time to Act?

Inheritance Tax (IHT) planning is frequently regarded as something that people intend to deal with “one day”. For many families, that day only comes when there is a health scare, a bereavement, or a major change in the tax rules. With pensions due to be brought further within the IHT net from April 2027, and with continued political discussion about the future of wealth taxation, lifetime giving is once again becoming an important topic for many people.

In simple terms, lifetime giving means passing money or assets to someone else while you are still alive. It may be done for tax reasons, but the motive is often more personal: helping children onto the property ladder, supporting grandchildren through education, or making sure that family wealth is used when it is most needed.

The current position

Under the current regime, most outright gifts to individuals are potentially exempt transfers (PETS). If the donor survives for seven years from the date of the gift, the value of that gift usually falls outside their estate for IHT purposes. If they die within seven years, the gift may be brought back into account when calculating the tax due.

There are also smaller exemptions which can be useful. The annual exemption allows a gift of up to £3,000 each tax year, and unused allowance can be carried forward for one year. Small gifts, certain wedding or civil partnership gifts, gifts between spouses or civil partners, and regular gifts out of surplus income may also be available in the right circumstances.

These rules sound straightforward, but the detail matters. A gift must be a genuine gift. If someone gives away an asset but continues to enjoy it as before, the gift with reservation rules may apply. A common example is giving a house to children while continuing to live in it rent-free. In that situation, the property may still be treated as part of the donor’s estate.

Why pensions have changed the conversation

For some years, pensions have often been treated as a very attractive asset from an estate planning perspective. In many cases, pension funds have sat outside the estate for IHT, meaning that clients were sometimes advised to use other savings first and preserve pension funds for the next generation.

That approach may now need to be reconsidered. From 6 April 2027, most unused pension funds and pension death benefits are due to be included in the value of a person’s estate for IHT purposes. Death in service benefits paid from registered pension schemes and certain dependant pensions are expected to remain outside the new rules, but the change is still significant.

This may alter the order in which people use their assets during retirement. A client who previously regarded their pension as the last pot to touch may now need to consider whether drawing pension funds earlier, spending them, gifting surplus income, or using other planning tools would produce a better overall result. The answer will depend on age, health, income needs, beneficiary circumstances and the wider estate.

Gifting sooner rather than later

The seven-year rule naturally rewards early planning. A gift made today starts the clock running today. Waiting until the rules change, or until further announcements are made, may reduce the available planning window.

However, acting quickly should not mean acting rashly. The first question is always whether the donor can afford the gift. A tax saving is of little comfort if the donor later needs funds for care fees, housing, medical support, or simply maintaining their normal standard of living. It is also important to consider whether the recipient is ready to receive the money. A gift into the hands of an adult child may be exposed to divorce, bankruptcy, poor financial decisions, or pressure from others.

In some cases, a trust may be worth considering. Trusts can provide protection and control, although they bring their own tax and administrative consequences. They are not a simple substitute for an outright gift, but they can be useful where there are vulnerable beneficiaries, blended families, young children, or concerns about preserving wealth for a particular purpose.

Planning in an uncertain political climate

IHT is politically sensitive. It affects a relatively small proportion of estates, but it generates strong feeling because it is charged at a time when families are already dealing with loss. It is therefore not surprising that a new prime minister, or a new government agenda, may lead to speculation about further changes.

Possible future changes could include amendments to the seven-year rule, changes to reliefs and exemptions, further restrictions on business or agricultural property relief, or adjustments to the nil-rate band and residence nil-rate band. None of these should be assumed until legislation is published. Nevertheless, uncertainty itself can influence behaviour. Some clients may choose to accelerate gifts while the current rules remain available. Others may prefer to pause until the direction of travel is clearer.

The sensible approach is not to base important family decisions on rumours. Instead, clients should review their position now, understand what the existing rules allow, and consider whether any action would still make sense even if the tax advantage were reduced. Good estate planning should work for the family first and for the tax position second.

Practical points before making a gift

Before making a significant lifetime gift, it is worth taking advice on the donor’s Will, Lasting Powers of Attorney, care planning, income requirements, Capital Gains Tax, and the recipient’s own circumstances. A gift of cash is very different from a gift of property, shares or business assets.

Records are also important. Executors may need to report gifts after death, sometimes many years later. Keeping a clear schedule of gifts, dates, amounts, recipients and the exemption relied upon can save a great deal of difficulty for the family. Where gifts are made out of surplus income, evidence of income, expenditure and regularity is particularly important.

Families should also remember that IHT planning is rarely a one-off exercise. The value of assets changes, family relationships change, and the law changes. A plan that was sensible five years ago may need updating in light of the 2027 pension reforms and any future measures announced by the government.

How Fraser Dawbarns can help

Lifetime giving can be a valuable way of reducing the value of an estate, but it should be approached carefully. The best plan will usually balance tax efficiency with security, flexibility and family harmony.

If you are considering making gifts, reviewing your pension arrangements, or updating your Will in light of the forthcoming IHT changes, our estate planning and Wills specialists can help you to understand your options and put a plan in place that reflects your circumstances.

For individual advice please complete the enquiry form and we’ll be in touch.  Alternatively contact the specialists in any of our offices.

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This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek advice specific to your own circumstances. Fraser Dawbarns LLP is always happy to provide such advice.