Inheritance Tax: What You Need to Know Before Making Any Decisions
As we await further details following Rachel Reeves’ Autumn Statement back in 2024, our key message remains simple: don’t panic.
At present, we do not have any new legislation in force, so it’s impossible to say with certainty what the upcoming changes will mean in practice. Acting too early could, due to the law of unintended consequences, actually put you in a worse financial position once the final rules are revealed.
There has always been a way to mitigate inheritance tax (IHT) and the key is to plan ahead. Over 40 years ago, former Labour Chancellor Roy Jenkins famously described IHT as:
“A voluntary levy, paid by those who distrust their heirs more than they dislike the Inland Revenue.”
This sentiment is as relevant today as it was then.
Understanding the Current IHT Rules
Under current regulations, individuals can pass on a portion of their estate tax-free, known as the nil rate band, which is currently set at £325,000. If you are widowed, you may also benefit from your late spouse’s unused nil rate band—potentially doubling the threshold to £650,000.
There’s also the residence nil rate band (RNRB), which allows an additional £175,000 to be passed on tax-free when a home is left to direct descendants (children or grandchildren). This too can be doubled if a spouse has died, potentially increasing your tax-free allowance to a total of £1 million per couple.
Tapering of the Residence Nil Rate Band (RNRB)
For estates over £2 million, the RNRB is gradually reduced. For every £2 your estate exceeds the £2 million threshold, you lose £1 of the RNRB.
Gifting to Reduce Your Estate
Several gifting allowances are currently available that can reduce the value of your estate over time:
Spousal Transfers: Exempt from IHT.
Annual Exemption: £3,000 per person, per tax year. You can carry forward last year's unused allowance.
Small Gifts: Up to £250 per person, though these are unlikely to have a major impact.
Gifts on Marriage:
- £5,000 to a child
- £2,500 to a grandchild
- £1,000 to anyone else
Gifts out of Normal Expenditure: These are unlimited if they meet three criteria:
- Made regularly
- Are paid from surplus income
- Don’t affect your standard of living
So, what’s Changing?
From 6 April 2027, most pension funds will be included in the value of an individual’s estate for IHT purposes.* The pension scheme will have to pay the proportional share of the IHT charge, if applicable.
How Can You Plan Ahead?
Whether it's taking advantage of your tax-free cash, considering life insurance, or even buying an annuity—there are several strategies that may help mitigate IHT on your pension or estate. What’s right for you will depend on your individual circumstances.
Talking to a financial expert will help you understand how the current and proposed changes will affect you, as well as the best ways to mitigate the amount of tax owed both now and in the future.
Do not rush into action based on assumptions. Wait for the final legislation and consultation outcome, expected later this year.
By Gregor Watt
Managing Director and Chartered Financial Planner
HJP Chartered Financial Planners
To find out more about Greg, click here
For more information, take a look at our Business Owner Advice Service
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
*Please note this proposal is currently under consultation with the full outcome expected later in the year.
Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.
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