Inheritance Tax impact on your family explained as more changes 'being considered'
Rachel Reeves could be set to introduce more changes to Inheritance Tax, a report claims, including a possible cap on lifetime gifting.
Under current rules, if someone lives for more than seven years after making a gift, then this transfer is not subject to Inheritance Tax.
If the gift is given three to seven years before your death, then it is taxed on a sliding scale known as "taper relief" which starts at 32%.
This cap would limit the amount of money or value of assets an individual can donate, while the Treasury is also said to be looking at potential changes to the "taper relief" for lifetime gifting.
A Treasury spokesperson told The Mirror: 'As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy – which is our focus.
'Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8bn and cut borrowing by £3.4bn.
'We are committed to keeping taxes for working people as low as possible, which is why at last Autumn's Budget, we protected working people's payslips and kept our promise not to raise the basic, higher or additional rates of Income Tax, employee National Insurance, or VAT.'
The vast majority of families do not end up paying Inheritance Tax when a loved one dies, due to exemptions that are in place.
However, there are changes that have already been announced and that will come into force over the next few years, including making it so pensions are subject to Inheritance Tax.
What is Inheritance Tax?
Inheritance Tax is sometimes paid on the "estate" of someone that has died - this includes property, possessions and money. As we've mentioned above, Inheritance Tax is only due for wealth transferred within seven years of death.
Inheritance Tax is also only due if the value of your estate is above £325,000 - although this can actually often be much higher depending on who you leave your estate to.
For example, there is no Inheritance Tax to pay when an estate is left to your spouse or civil partner. If you give away your home to your children - this includes adopted, foster or stepchildren, or your grandchildren - then the Inheritance Tax threshold can increase to £500,000.
This includes the basic £325,000 allowance, plus an additional £175,000. If you are married or in a civil partnership, any Inheritance Tax allowance that isn't used can be passed on when someone dies.
This means a couple can potentially pass on as much as £1million without their estate being subject to Inheritance Tax. If your estate is subject to Inheritance Tax, then the standard rate is 40%.
There are ways to reduce how much Inheritance Tax is paid on your estate. Your rate of Inheritance Tax on some assets is reduced from 40% to 36% if you leave at least 10% of the net value after any deductions to a charity in your will.
Inheritance Tax changes that have already been announced
Inheritance Tax may be due on pensions you inherit from April 2027. At present, if you inherit a pension from someone who died before the age of 75, then there is no tax to pay.
If the person dies after the age of 75, then you pay Income Tax when you draw from the inherited pension, as it will be treated as income.
But from April 2027, inherited pensions will be subject to Inheritance Tax and included in the "estate" of someone who has died. Death in service payments will not be liable for Inheritance Tax.
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Scottish Sun
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- Scottish Sun
Rachel Reeves eyes up inheritance tax changes - what you can do NOW to protect your finances
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