Quilter data has revealed that a mere 1,490 estates paying inheritance tax have used the “gifts out of surplus income” rule.
The secret trick that less than 2% use to slash their HMRC inheritance bill has been revealed. Quilter data has revealed that a mere 1,490 estates paying inheritance tax have used the “gifts out of surplus income” rule.
The ‘gifts out of surplus income’ rule allows individuals to give away money without falling foul of the seven-year inheritance tax rule. But just 480 estates benefited from the tax break in 2021-2022, figures shared by HM Revenue & Customs (HMRC) under Freedom of Information revealed.
This represented just 1.7 per cent of the 27,800 estates which paid inheritance tax that year. In 2020-2021, 510 estates claimed the relief – or 1.9 per cent – compared to 500 the year before.
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The surplus income rules mean that if families can prove that there were regular payments then that money is also exempt.
Rachael Griffin, tax and financial planning expert at Quilter, which submitted the information request, said: “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 inheritance tax liabilities.”
She said: “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.”
Tom Selby, of online platform AJ Bell, said: “It is inevitable and entirely logical that as the number of households being pulled into inheritance tax increases, the number of people aiming to take advantage of gift rules to minimise the tax bills faced by their beneficiaries will rise.
“There is already evidence of savers taking action ahead of this proposed change in 2027.”
Steven Cameron, of pension provider Aegon, said: “This approach can also be followed if an individual can show they have surplus income from their pension once in payment although this is likely to be feasible for only a very small number of individuals.
Mr Cameron said anyone looking to take advantage of the tax relief should seek professional advice, as “there are many rules to follow here”.
A Treasury spokesman said: “We continue to incentivise pensions savings for their intended purpose – of funding retirement instead of them being openly used as a vehicle to transfer wealth – and more than 90pc of estates each year will continue to pay no inheritance tax after these and other changes.”
