Inheritance tax loophole allows more gift money to children

New strategies for gift-giving allow parents to bypass inheritance tax concerns.

Loophole enables tax-free gifts to children under inheritance rules

A little-known loophole enables parents to gift their children larger sums of money without incurring inheritance tax, provided they follow specific rules. This method, known as gifting out of surplus income, allows parents to give away additional funds that are not subject to the seven-year rule. For couples with a shared inheritance tax threshold of £1 million, adherence to these regulations can result in substantial savings. Experts emphasize that gifts must originate from surplus income, and both the donor's living expenses and meticulous record-keeping are essential to utilize this exemption effectively. The trend has gained popularity, as reflected in a significant jump in sums transferred through this loophole, totaling £144 million in 2023-2024, up from £52 million the previous year.

This new trend in gifting strategy could signal a shift in how families approach wealth transfer, particularly as inheritance tax thresholds remain frozen until 2030. More families are seeking ways to sidestep future tax bills, and financial advisers report a growing number of inquiries about these loopholes. However, while the opportunity for tax savings is appealing, it raises concerns about equitable wealth distribution and the potential consequences of exploiting these allowances. As parents look for ways to support their children financially, they must weigh the immediate benefits against the long-term implications of such financial maneuvers.

Highlights

As families navigate these loopholes, careful planning becomes vital in the face of upcoming financial challenges.