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 changes. Now that Reeves has revealed her Budget, there are some important changes to Inheritance Tax (IHT) that you may need to know about.
Understanding the 2024 Autumn Budget and Inheritance Tax
One of the key changes Rachel Reeves announced was that she would extend the freeze on the Inheritance Tax nil-rate band threshold 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 the March 2021 Spring 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. Now, Rachel Reeves has 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.
Key changes to Inheritance Tax
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 to inheritance tax and pensions may impact how they 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 2024 Autumn 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 also provide tailored solutions to ensure you are making the most of the available options.
How can you 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, and
- 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.
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.
Get in touch
There are many ways of managing these changes to 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. If you’re concerned about how the 2024 Autumn Budget could affect your estate plan, we can help. Why not try our IHT calculator? You can contact us by emailing hello@fcadvice.co.uk or calling 0333 241 9910.
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.