More retirees are now using their pensions to give regular cash gifts to their children and in some cases cutting their future inheritance tax bill in the process.
Financial advisers say many pensioners are no longer taking all of their 25 per cent tax-free pension lump sum in one go, but instead choosing to draw it down in smaller, regular payments.
These payments are then passed on to children or grandchildren as "surplus income".
Under a little-known inheritance tax rule, gifts made out of surplus income are exempt from the 40 per cent tax charged on estates above £325,000.
Crucially, they do not fall under the usual seven-year rule meaning the money escapes tax straight away, as long as the person giving it away can prove it came from income and that they still have enough left to maintain their usual standard of living.
Wealth managers say this tactic is becoming increasingly popular as families look for ways to pass money down the generations while avoiding a hefty tax hit.
Despite the potential savings, very few people are actually using this inheritance tax exemption.
A Freedom of Information request by wealth manager Quilter found that just 1,490 estates made use of it in the past three years less than two per cent of those paying inheritance tax.
Experts say the rules are complicated and the paperwork is off-putting, which explains why take-up has been so low.
But interest is expected to grow, as from 2027 pension savings will start being included in inheritance tax calculations. That means more families could look to this approach as a way of passing on wealth while keeping their tax bills down.
Nick Nesbitt, head of private client at Forvis Mazars, stated: "There is a growing view that pension tax-free cash can be classed as income for gifting purposes, if taken gradually over time."
Keeping detailed records is vital for anyone trying this strategy,
| GETTYEamonn Prendergast, chartered financial planner at Palantir Financial Planning, confirmed witnessing increased activity: "I've definitely seen an uptick in this, particularly among higher-net-worth clients. It's not just from tax-free cash, but from other pension withdrawals and forms of income too."
He explained that successful implementation requires "the gifting has to be regular, sustainable, and not impact your standard of living, otherwise HMRC are likely to challenge it."
Nevertheless, professionals emphasise that treating pension tax-free cash as income for gifting remains a "grey area" without definitive guidance from HMRC.
Tax professionals caution that the absence of explicit HMRC guidance creates substantial uncertainty for beneficiaries who might face unforeseen tax demands.
"In theory, this means you can pass your tax-free cash on completely tax-free but HMRC hasn't clarified this position yet," Mr Nesbitt explained.
Mr Prendergast characterised the approach as "risky" because recipients of inheritances could encounter unexpected tax obligations: "Until HMRC provides proper clarity, this area will remain risky, but for clients who can afford it and keep thorough records, it can still be a valuable planning tool."
Zoë Dagless, director at Meliora Financial Planning, expressed scepticism: "I find this area particularly grey. Personally, I would err on the side of caution and say it's unlikely [to be considered income for gifting purposes]."
Keeping detailed records is vital for anyone trying this strategy, with advisers warning that without clear evidence of regular gifting, HMRC could challenge it later.
An expert has shared a way families can cut down their inheritance tax bill | GETTY 
Families may not know whether HMRC will accept the gifting arrangements until it’s too late, leaving estates open to dispute
| GETTY"Record-keeping is absolutely key; if clients can't clearly show a pattern and that the gifts are genuinely from surplus income, it will be difficult to defend later," Me Prendergast warned.
Ms Dagless called for greater transparency: "I'd certainly welcome greater clarity from HMRC on what constitutes 'gifting out of income,' so the rules are more transparent and easier for clients to understand."
When approached for clarification on whether pension tax-free cash qualifies as income for gifting purposes, HMRC declined to provide definitive guidance.
"We consider each case on its facts," a spokesperson said.
Because inheritance tax is only assessed after someone dies, families may not know whether HMRC will accept the gifting arrangements until it’s too late, leaving estates open to dispute.