With the upcoming changes to inheritance tax (IHT) rules on pensions from April 2027, paraplanners face new challenges in supporting clients with effective estate planning strategies. Shaun Moore, Tax and Trust specialist at Quilter looks at the importance of lifetime gifting, as well as ensuring clients receive expert guidance.
Lifetime gifting is a key area that can make a significant difference if planned correctly.
Expert guidance is key to ensuring clients navigate this area successfully and understand the gifting rules, preventing any nasty surprises for their loved ones.
Understanding how gifts are treated for IHT
When a client gives money away, the gift will fall into one of three categories for IHT:
1. Exempt: The gift is immediately outside the client’s estate.
2. Potentially exempt transfer (PET): The gift will fall outside the client’s estate after 7 years have passed, provided the client survives 7 years.
3. Chargeable lifetime transfer (CLT): As above, the gift will fall outside the client’s estate after 7 years, but the gift may be subject to a lifetime IHT charge of 20%.
The first group, exempt gifts, is where we will focus in this article.
Annual exemption
Clients can give away up to £3,000 each tax year without any IHT implications, and any unused allowance can be carried forward for one year.
For couples, this means up to £6,000 each year, or £12,000 if the previous year’s allowances remain untouched.
Spouse and civil partner exemption
Transfers between most long‑term UK‑resident spouses or civil partners are free from IHT.
While useful, this exemption only delays the potential tax: the value simply moves to the recipient’s estate, where it may later be taxable.
For this reason, many clients look instead at passing money down to children or grandchildren.
Gifts out of normal expenditure
This exemption remains one of the most powerful.
If a gift is part of a client’s regular spending (‘normal expenditure’), comes from income (not capital), and doesn’t reduce their standard of living, it can fall immediately outside their estate with no seven‑year waiting period.
There is no upper limit, provided all three conditions are met.
What counts as ‘normal expenditure’?
HMRC will expect to see evidence that gifts were regular or habitual, typically over three or four years, and that the client (the donor) intended to continue making similar payments.
Paraplanners and advisers play a key role here: helping clients to keep records, document their intentions, and capture details of each gift.
When assessing whether the gift is made from income, HMRC may include interest and dividends, but not withdrawals from existing capital.
Where pensions fit into the picture
The upcoming IHT changes to pensions have inevitably prompted clients to ask whether pension income, or pension commencement lump sums (PCLS), can be used effectively under these exemptions.
Pension payments can be taken in several ways, from a one‑off PCLS to spreading that lump sum over a set period or taking a blended PCLS plus income arrangement.
In all these scenarios, it is our understanding that payments will be classed as ‘income’, meaning gifts made from them could satisfy the ‘normal expenditure’ exemption, as long as all three conditions are met.
If not, clients may fall back on the standard £3,000 annual exemption or rely on the gift being treated as a PET.
For more information on the IHT treatment of pension gifting, paraplanners can read Quilter’s quick reference guide.
Income may be deemed capital after two years
It’s worth remembering that payments deemed income may not be considered income indefinitely.
HMRC may reclassify income as capital if it accumulates in a bank account for more than two years without being used, unless there is evidence to the contrary.
This relates to all income payments, not just pension income. Timing and record‑keeping are important.
A renewed focus on lifetime gifting
Individuals can address surplus wealth in several ways, most commonly by spending it, arranging a life policy to cover the IHT liability, or gifting assets during their lifetime.
Lifetime gifting is becoming increasingly popular, as it can, when organised appropriately, reduce future IHT exposure considerably and enable families to assist the next generation at pivotal moments, rather than waiting until after death.
It remains vital that paraplanners provide professional guidance to achieve the best results for families, making sure that planning is both comprehensive and supported by meticulous record keeping.
For further guidance on planning for Inheritance Tax, paraplanners can visit Quilter’s website: Inheritance Tax (IHT) planning | Quilter.
To help paraplanners navigate this important area of financial planning you’ll find a comprehensive guide to lifetime gifting, practical tools including Quilter’s IHT calculator and excess income tool, details on the Excess Income trust, and a wealth of additional resources.
Main image: bow, gifting, raelle-cameron-KpWid3vV2nY-unsplash
