Pension pots will lose their exemption from inheritance tax from next April, a change expected to leave almost 40,000 people facing higher death duties and prompting growing numbers of savers to give away wealth to children and grandchildren earlier than planned.
The change means many people who had hoped to use their pension to pass on wealth tax-free are now working quickly to move spare pension money outside of their estate before the rules take effect.
Some savers are also rushing to make gifts sooner because of fears that Prime Minister Andy Burnham could further increase taxes on death to help pay for his reforms to social care. One option that has been mooted is a 10 per cent tax on all estates, although no details have been confirmed.
Gifts are free of inheritance tax if they are made at least seven years before death, so wealth planners say many people are keen to start that clock ticking as soon as possible.
But handing over cash, property or jewellery raises a difficult question for many parents and grandparents: will the money be used wisely, and are the recipients ready to look after it responsibly?
"It's only human to hope that whoever receives the gift makes the most of it," said Sarah Coles, head of personal finance at investment platform AJ Bell.
Why some want to retain control
Once money is handed over, there is nothing to stop a recipient frittering it away, or doing something with it that upsets the giver, such as selling a family holiday home at the first opportunity.
With 42 per cent of marriages expected to end in divorce, there is also a legitimate fear that a gift made to even the most settled family member could end up in the wrong hands.
Sharing your wishes
The simplest and cheapest way to retain some influence is to speak to the beneficiary directly, for example asking that a valuable bracelet stay in the family or that a lump sum be used only to improve a home.
There is no guarantee it will be honoured, however, and being too prescriptive carries risk. "They might be so affronted by your conditions that they refuse to accept the gift," Coles said. "Or they might feel you are being controlling or manipulating, so that even if they take the gift, it damages your relationship."
Discretionary trusts
Growing numbers of families are placing gifts into trusts, according to Rachael Griffin of wealth manager Quilter. Discretionary trusts, the most common type used for inheritance tax planning, let a donor give up ownership of assets while keeping greater influence over how the gifts are used.
Trustees, rather than the donor, own the assets and decide how they are distributed, but a donor can write a non-binding letter of wishes, for instance stating that money should be released when a child turns 25 or used for a house deposit. At least two trustees must be named, one of whom can be the donor.
Money is not automatically free of death duties: if the donor dies within seven years, the gift still forms part of the estate. Sums placed in trust above £325,000 within a seven-year period face a 20 per cent entry tax charge, with a further charge of up to 6 per cent every ten years and when capital is paid out. The trust is also liable for income and capital gains tax, so legal advice is essential.
Protecting gifts from divorce
Where a family fears a marriage may be on the rocks, keeping a gift in a separate bank account in the recipient's own name, rather than a joint account used for household spending, can help prove it is a non-matrimonial asset.
Coles suggested donors encourage a pre-nuptial agreement, or a post-nuptial agreement if the couple is already married, drawn up specifically to protect the gift. Such agreements are not automatically binding in England and Wales, but courts give them significant weight.
Topping up pensions
Sean McCann of NFU Mutual said he was seeing more clients pay gifts directly into their children's pensions, locking the money away until age 55, rising to 57 by April 2028.
The beneficiary also receives tax relief on the contribution, an automatic 20 per cent boost to the pension, with higher-rate and additional-rate taxpayers able to claim a further 20 and 25 per cent relief respectively. For younger children, a junior individual savings account allows up to £9,000 a year to be paid in tax-free; the child gains control of the account at 16 and can access the money at 18.
Gifting property instead of cash
Giving an asset rather than spare cash can make a child or grandchild less likely to sell it, said Ian Dyall of Quilter, though donors who continue to use a gifted holiday home for free risk falling foul of the "gifts with reservation of benefit" rule.
McCann described one couple who placed a holiday home worth £650,000 into a discretionary trust with their children as beneficiaries. Because the parents continued to use the property, they had to document paying market-rate rent of £1,000 a week to the trust for it to count as a genuine gift.
The same rule applies to a main home: anyone who gifts their house but keeps living there rent-free will have the gift treated by HM Revenue and Customs as though it never happened, unless they move out or pay market rent. Being too prescriptive, such as barring redecoration, can also fall into this grey area, and there is always a risk a child could ask a parent to leave if the relationship sours.
Gifting from surplus income
Rather than a single lump sum, donors can make regular smaller payments under the "gifts out of normal expenditure" exemption, which are immediately free of inheritance tax provided they are regular, paid from income rather than capital, and do not affect the donor's standard of living.
Meeting those conditions allows an unlimited amount to be passed on without the need to survive seven years, provided the donor keeps a letter recording the value, frequency and source of the payments.
This approach lets a donor see how a beneficiary manages money over time. Griffin said that if, after three years, a parent found their son had spent the gift on a world cruise instead of its intended purpose, they could simply stop making the payments. The exemption can also be used for direct regular payments such as school fees, and donors can halt payments if they later need the money for their own care.
