Whisper it, Rachel Reeves forgot to close one inheritance tax loophole

This untouched relief is far more powerful than any other way to reduce your liability

Rachel Reeves’s first Budget has torn up the financial plans of thousands of families across the country.
Farmers and business owners are scrambling to head off the Chancellor’s raid that will see their inheritance tax bills dramatically increased.
But far more people will be caught out by the biggest change to tax rules so far announced by Labour.
Pensions will (once again) be subject to death taxes from April 2027. Yes, that means you have more than two years to get your affairs in order, but in many cases the money held in pension pots is largely trapped – the choice is between paying 40pc income tax today, or 40pc inheritance tax tomorrow.
I’ve simplified, but the point is that there is little or nothing you can do about money already in a pension to fend off the Chancellor’s raid which, no matter what Labour says, certainly is a form of wealth tax.
But, curiously, Ms Reeves left one inheritance tax break entirely untouched.
As expected, she tightened up the tax breaks afforded to agricultural land and “business property relief”, but she did nothing to change the “gifting out of excess income” rules.
Now I don’t want to give her any ideas, but this relief is potentially far more powerful than any other way to reduce your inheritance tax liability.
Yes, you have to be relatively financially comfortable to use it, but you certainly don’t have to be mega-rich.
Normally, you can give away £3,000 per year, plus £5,000 to a child for a wedding and as many small gifts of up to £250 per person as you want each tax year.
Readers will also be aware of the “seven-year rule”, where gifts made more than seven years prior to death are not counted as part of your estate.
But the excess or surplus income rule is far more powerful. There is no ticking clock to worry about and no limit on the value of the gifts.
The catch is that the gifts must be regular (or at least there was an intention they would be regular), that the money comes from income (not capital) and that the quality of life of the donor does not suffer as a result.
Your executor must be able to prove the gifts meet these requirements, so detailed record-keeping is essential. Accountants suggest keeping bank statements and running a basic profit and loss summary showing income and outgoings.
One neat way of making sure your carefully laid plans aren’t unwound by HMRC after your death could be to use your state pension payments. If you have a decent workplace pension and other investments, and little or no debt, it should be fairly easy to prove that the state pension you receive is “surplus”, to the extent that you don’t strictly need it to maintain your lifestyle.
By April 2025, the full state pension will be very nearly £12,000 a year. A simple spreadsheet showing monthly state pension payments coming into your account and then going out again to your children or grandchildren should pass HMRC’s test, all other things being equal (although of course there’s no way to say for certain until the time comes).
As the other legitimate ways to swerve death duties get squeezed or abolished entirely, you can be sure HMRC will be paying more attention to claims against this lucrative relief.
At the moment, only 500 or so estates make use of it every year – you can bet on the Chancellor’s fringe that figure will rise quickly now.
We have 12 months until Ms Reeves next reveals the contents of her red briefcase, there’s no time to waste.