On 30th October 2024, Rachel Reeves made history by becoming the first woman to deliver a Budget to the UK parliament. In the lead up to the announcement, the Labour Party repeatedly spoke of a “£22 billion black hole” in the public finances and warned of “difficult decisions” ahead. This led to much speculation about tax increases that could affect your financial plan. Now that Reeves has revealed her Budget, there are some important changes you may need to know about, especially where Inheritance Tax (IHT) is concerned.
Read on to learn how Budget changes could affect your financial plan.
Understanding the UK Budget and Inheritance Tax (IHT)
The chancellor extended the “nil-rate band” freeze until 2030.
One of the key changes Rachel Reeves announced was that she would extend the freeze on inheritance tax thresholds until 2030.
In 2024/25, you can pass up to £325,000 to your beneficiaries without inheritance tax. This is your “nil-rate band”. You may also benefit from up to an additional £175,000 “residence nil-rate band” when passing your main home to a direct descendant such as a child or grandchild.
Additionally, you can pass your entire estate to a spouse or civil partner without inheritance tax and they inherit your unused nil-rate bands. This could mean, unless you have estates in excess of £2million, that you can pass on up to £1million between you. In its March 2021 Budget, the previous government froze the nil-rate bands until 2026 and later extended the freeze until 2028. Meanwhile, property prices have risen – and could continue to do so – and the value of your savings and investments may have increased.
As a result, more of your estate could exceed the threshold, meaning that your family pays more inheritance tax. That’s why, in July 2023, IFA Magazine reported that the number of people paying IHT rose by 17% in 2020/21, with an average bill of £214,000. Unfortunately, Rachel Reeves extended the nil-rate band freeze until 2030. As a result, it may be more important than ever to find ways to potentially mitigate inheritance tax in the future. One strategy to consider is combining inheritance tax and life insurance, which can provide liquidity to cover potential tax liabilities upon the policyholder’s death. This approach ensures that heirs receive their intended inheritance without the burden of tax consequences. Additionally, exploring other estate planning options, such as trusts, can further help reduce the taxable value of your estate.
What’s more, the Chancellor also announced changes to the inheritance tax treatment of pensions.
Key Areas Where Budget Changes Can Impact IHT
Your pensions will no longer be exempt from Inheritance Tax from April 2027 onwards.
Currently, pensions could be a useful estate planning tool because they normally fall outside of your estate for inheritance tax purposes. Previously, you could have used this to your advantage by leaving as much wealth in your pension as possible and relying on other savings and investments to fund your lifestyle. This may have meant that you were able to pass more wealth to your family tax-efficiently after your death. However, recent changes in tax legislation may impact how pensions are treated in estate planning. Despite this, pension protection against inheritance tax remains an appealing feature, allowing individuals to preserve wealth for their beneficiaries. Consequently, it’s essential to stay informed about the evolving regulations to maximize the benefits of this strategy.
However, in her Budget speech, the chancellor announced that pensions would no longer be exempt from inheritance tax from 6 April 2027. This could mean that it’s more challenging to mitigate IHT in the future. Fortunately, there are other ways to potentially reduce the tax your family pays. One potential strategy is to make use of gifts or trust structures that can help minimize the tax burden. Additionally, reviewing barry’s inheritance tax arrangements may reveal opportunities to protect family wealth more effectively. Consulting with a financial advisor can provide tailored solutions to ensure you are making the most of the available options.
Recent Budget Announcements and Their IHT Implications
We can help you find alternative ways to reduce the Inheritance Tax your family pays.
While changes to the tax treatment of pensions could make it more difficult to reduce inheritance tax, there are ways we could help you pass more wealth to your loved ones. For example, in 2024/25, the first £3,000 per year that you give away as a financial gift falls outside your estate for inheritance tax purposes. You can also gift an additional £5,000 to a child or £2,500 to a grandchild or great-grandchild for a wedding.
You may also be able to make regular “gifts from income”, provided that the payments:
- Are regular
- Come from income rather than capital
- Don’t diminish your standard of living.
The “small gifts” rule also allows you to make payments of up to £250 to as many people as you like, provided you have not used any other gifting exemption on them.
Any further gifts may fall outside your estate, provided you survive for seven years after making them. Charitable donations are considered outside of your estate for inheritance tax purposes too.
Alternatively, you may benefit from using a trust – a legal arrangement that allows you to transfer ownership of assets to another party for the benefit of a third party. Our previous article about the pros and cons of using trusts to mitigate IHT has more information on this.
In some cases, you may also be able to transfer some of your savings into more tax-efficient investments. However, it’s important to seek advice here so you can carefully consider the level of risk you would be taking and whether you have the financial capacity to do so. There are many ways of reducing your inheritance tax over and above those mentioned above. We can help you explore these tax planning strategies and potentially reduce the IHT your family pays after you are gone. Additionally, understanding the inheritance tax impact on your finances is crucial for effective long-term planning. By implementing strategic financial moves now, you can create a legacy that supports your loved ones without undue tax burdens. Engaging with a qualified advisor will provide you with tailored solutions to minimize these potential liabilities. Managing inheritance tax strategies requires a proactive approach to ensure that your wealth is preserved for future generations. Regularly reviewing and adjusting these strategies can lead to significant savings, allowing your beneficiaries to benefit more fully from your estate. By staying informed and working closely with a financial expert, you can navigate the complexities of inheritance tax effectively. Exploring the pros of using trusts for inheritance tax can be a game-changer in your estate planning. Trusts not only provide control over how and when your assets are distributed but can also offer additional protection against potential tax liabilities. By integrating trusts into your financial strategy, you can ensure a smoother transition of your estate to your heirs while maximizing the value they receive. In addition to trusts, consider other inheritance tax reduction strategies that may align with your financial goals. By diversifying your investment portfolio and utilizing gifts during your lifetime, you can further decrease the taxable value of your estate. Engaging in these proactive measures will not only enhance your estate’s longevity but also ensure that your loved ones inherit as much of your wealth as possible.
Get in touch
If you’re concerned about how the Budget could affect your estate plan, we can help.
Find out if your loved ones would have to pay Inheritance Tax.
Email hello@fcadvice.co.uk or call 0333 241 9900.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning or trusts.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term (minimum of 5 years) and should fit in with your overall risk profile and financial circumstances.
