Experts Urge Brits to Claim Overlooked IHT Relief: The UK government’s looming changes to inheritance tax (IHT) rules have prompted a growing number of financial experts to urge Brits to take advantage of underused tax reliefs—before it’s too late. With a major pension tax change set to begin in April 2027, households with sizeable estates could be facing unexpected tax bills unless they act now.
One such overlooked tax-saving opportunity is the “gifts out of surplus income” relief, which allows individuals to pass wealth to loved ones without facing the usual 40% IHT charge. Yet, government figures show only a tiny fraction of estates are making use of it. With the clock ticking and pensions set to come under the IHT umbrella, there’s never been a more important time to get ahead of the changes.
Experts Urge Brits to Claim Overlooked IHT Relief
The UK’s upcoming changes to pension inheritance rules are a wake-up call for anyone looking to pass on wealth efficiently. With unused pensions set to be taxed from 2027, it’s vital to review your estate planning strategies now. One of the most overlooked but effective tools is the gifts out of surplus income relief.
Despite its low uptake, this exemption offers a powerful way to reduce your IHT liability—provided it’s used correctly. By identifying your surplus income, creating a regular gifting habit, and keeping records, you can significantly cut the tax bill for your loved ones in the future.
| Topic | Details |
|---|---|
| Pension IHT Change (April 2027) | From April 6, 2027, unused defined contribution pension funds will be counted as part of a deceased’s estate, making them potentially liable for the 40% IHT charge. |
| Current IHT Allowance | £325,000 standard nil-rate band; £500,000 if a main residence is left to direct descendants; up to £1 million for married couples. Gov.uk |
| Gifts Out of Surplus Income Relief | This allows individuals to make regular gifts from surplus income without incurring IHT. Crucially, these gifts do not use up your £3,000 annual gift allowance. |
| Utilization Statistics | Just 1,490 estates took advantage of this relief in three years, according to Freedom of Information data, despite being a powerful estate planning tool. |
| Next Steps for Tax Planning | Assess estate value, use available IHT reliefs, consider gifting strategies, document income and gifts, and consult a tax advisor. |
What’s Changing With Pensions and Inheritance Tax?
As of today, unused pension funds can be passed on to your beneficiaries free of IHT if you die before age 75. If you die after 75, beneficiaries may pay income tax when drawing down the pension—but not IHT.
That’s changing.
Starting 6 April 2027, defined contribution pensions (such as SIPPs and workplace pensions) will be included in the value of your estate when you die, making them liable for IHT at 40% above the nil-rate threshold. This could impact millions of savers who expected to pass pensions on tax-free.
Example:
Let’s say John dies in 2028 with:
- £400,000 home
- £100,000 savings
- £500,000 unused pension
Before 2027, only the home and savings would be taxed under IHT, so he’d be under the £500,000 threshold for passing to direct descendants. But after 2027, his total taxable estate would be £1 million, potentially triggering an IHT bill of up to £180,000.
What Is the ‘Gifts Out of Surplus Income’ Relief?
The Gifts out of Surplus Income relief is an HMRC-approved exemption that lets you make regular gifts from your income, not capital, without being taxed.
To qualify:
- The gift must be part of a regular pattern (e.g. monthly, annually).
- It must be paid out of income (like salary, dividends, rental income).
- You must retain enough income to maintain your usual standard of living.
Unlike the £3,000 annual gift allowance, this has no upper limit—making it a hugely valuable, but underutilized, relief.
Common Examples:
- Giving your adult children £1,000 a month from your pension or rental income.
- Paying for your grandchildren’s school fees directly from your income.
- Covering a family member’s rent or mortgage payment on a regular basis.
Provided these payments are regular and documented, they can escape IHT entirely.
Why Aren’t More People Using This Relief?
Despite its advantages, only 1,490 estates used the surplus income relief over a recent three-year period. Experts believe the low usage is due to:
- Lack of awareness – many people simply don’t know it exists.
- Complexity and documentation – you need to prove the gifts are regular and from income.
- Misconceptions about eligibility – people assume they need large incomes to qualify, which isn’t always true.
But with pensions soon to be taxed, many financial advisors now say this could be one of the best tools to pass on wealth tax-efficiently.
How to Use Overlooked IHT Relief: A Step-by-Step Guide
1. Assess Your Income and Spending
Determine your total annual income (from pensions, work, dividends, etc.) and your usual expenses. The difference is your surplus income.
2. Identify Regular Gifts You Want to Make
Choose what you want to gift regularly—monthly support to a child, a yearly donation, paying someone’s bills, etc.
3. Keep Written Records
Use a simple spreadsheet or written statement noting:
- The gift amount
- The date
- The source of income
- A declaration of your intent to make it a regular gift
You can download HMRC Form IHT403 to record this if you’re serious about using the exemption.
4. Notify Family and Keep Receipts
Make your intentions clear in writing. Store receipts, statements, or correspondence in case your estate is reviewed by HMRC.
5. Consult a Financial Planner
Professional advice ensures your plan is compliant, sustainable, and well-documented.
Additional IHT Reliefs to Know
Here are a few more tools you might use in your estate planning:
- Annual Exemption: Gift up to £3,000 per year tax-free.
- Small Gifts Exemption: Give £250 per year to as many people as you like.
- Wedding Gifts: Give up to £5,000 to children for their wedding.
- Business Relief: Pass on business assets with up to 100% IHT relief.
- Charity Donations: Gifts to registered UK charities are exempt from IHT.
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Frequently Asked Questions (FAQs)
What is the IHT threshold in 2025?
As of 2025, the nil-rate band is £325,000. This increases to £500,000 when leaving your main home to direct descendants. A couple can combine allowances for up to £1 million.
Will the new pension rule affect defined benefit (DB) pensions?
No. The April 2027 changes affect defined contribution pensions only. Final salary and other DB pensions are not impacted in the same way.
Can gifts out of surplus income be one-off payments?
Not usually. To qualify, gifts must be part of a regular pattern. However, you can use other exemptions (like the £3,000 annual exemption) for one-off gifts.
Do I need to notify HMRC every time I make a gift?
No, but your executors must prove the gifts meet the criteria. Keeping documentation now helps avoid issues later.
