Rachel Reeves eyes up inheritance tax changes - what you can do NOW to protect your finances

Scottish Sun

2 days ago

We explain what is happening and YOU can protect your finances
DEATH TAX Rachel Reeves is eyeing up inheritance tax changes – what you can do NOW to protect your finances
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RACHEL Reeves is rumoured to have set her sights on changes to inheritance tax as a way to fill the £50billion blackhole in finances.
Parents could be stopped from making unlimited tax-free gifts to kids, under proposed plans.
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Chancellor Rachel Reeves is planning inheritance tax changes
Credit: Reuters
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Currently you can give away unlimited amounts of cash to friends or family members without paying inheritance tax, as long as you do so seven years before you die.
The Chancellor is reportedly also considering changing the tapered rate at which the tax is charged, according to The Guardian.
Plus, inheritance tax will be charged on pension pots for the first time - a change that was announced in last year's Budget.
Rachel Reeves said today that any decisions around taxes will have to wait for the autumn Budget - but what can YOU do now to protect your finances and how does inheritance tax affect your wallet?
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What is inheritance tax?
IHT is a 40% tax on your estate when you die.
Currently, your estate includes your house, cash savings and any other possessions. Your pension is exempt.
You can pass on up to £325,000 in assets before any IHT is due, or up to £500,000 if you pass your property to your children or grandchildren.
There is also no IHT due between spouses, and you can leave them your IHT exemption when you die, so they could pass on up to £1million.
However, from April 2027, pensions will become part of your estate, which means they will also be liable for IHT.
This week Labour also confirmed it will charge inheritance tax on workers' retirement pots even if they die before they reach the minimum pension age, which is currently 55.
And from 2026, agricultural and business relief, which protects farms and businesses from IHT, will only apply up to £1million of assets.
After this, 20% tax will be due.
These changes could see people inheriting large pensions, farms or businesses being pulled into the net.
What are the rules on gifting?
YOU can currently give away unlimited amounts of money and assets to friends or family members without paying inheritance tax, as long as you do so seven years before you die.
If you pass away within seven years then the amount of tax you pay is charged at a tapered rate.
For example, gifts that were given three years before you pass away are subject to 40% inheritance tax.
But those that are handed over five years before your death are subject to inheritance tax at 16%.
How many people does IHT affect?
IHT is a big concern for many families, but figures suggest Brits hugely overestimate how many people are affected.
A YouGov poll in 2023 found that 31% of people thought their assets would be subject to IHT, while 28% said they weren't sure.
In reality, around 5% of estates are impacted, according to HMRC.
'A lot of people are concerned about it when it probably won't affect their family,' said Charlene Young, senior pensions and savings expert at AJ Bell.
'In 95% of cases, no IHT is due whatsoever.'
However, the upcoming changes could see more people owing the tax, which has sparked fresh concerns.
The number of estates owing IHT is set to double to 10% by 2030, according to government estimates, with around 1.5% more estates impacted because of pension rule changes.
Matt Smith, chartered financial planner at Buckingham Gate, said: 'We are seeing people being pulled into the net now who don't feel wealthy, they just see themselves as normal people who have saved diligently.'
Who is likely to be affected most by the changes?
The people most likely to be impacted by the IHT changes are those inheriting large businesses, farms or pension pots.
Mr Smith explained: 'People who have most of their assets in their pension will go from having no liability to having a chunky liability.
'Farms are particularly likely to be affected as they often have expensive assets such as land, machinery and livestock, even if they don't have much actual cash."
If you have a modest-sized pension and a typical home, your estate is still not likely to be impacted, particularly if you are planning to leave most of your assets to your spouse or children.
For example, if your home is worth £268,000 - the average UK house price, according to Zoopla - and you have a private pension worth £111,700, which is the average pot size, according to Hargreaves Lansdown, you would have £379,700 of assets to pass on.
If you left this to your spouse or kids, your estate would still be well below IHT thresholds.
'While plenty of people might be worried about the changes - particularly those who have worked hard to build up big pensions – most people will still remain unaffected,' Ms Young said.
Tips and tricks to avoid paying IHT
If you, your parents or your grandparents are concerned about IHT, there are a number of steps you can take to protect your assets.
Make a will
First, you should ensure your money gets to the right place by making a will, according to Ms Young.
'If you die without a will, your estate will fall under the rules of intestacy, which could mean a higher IHT bill.
'This is especially key for couples who aren't married, as unmarried partners will not automatically inherit from one another, even if they have lived together for many years.'
Check how to make one in our guide.
Get financial advice
If you're worried it could be worth speaking to a financial adviser specialising in estate planning.
They will ensure you have used all of your allowances and aren't paying more tax than you should.
You can find one using unbiased.co.uk - but remember, you will pay a fee.
Utilise gifting allowances
Until recently, pensions have been used as a way to harbour money to pass it on to loved ones, but experts say it may be more sensible to gift the money now if that was your plan.
If your in retirement and income is more than you spend, then consider setting up a plan for utilising gift-free allowances.
'The 'annual exemption' lets you give away a total of £3,000 each year, either to one person or split between several, and you can bring forward unused annual exemption for one year,' Ms Young said.
'Unlimited 'small' gifts of up to £250 per person can also be made, if you haven't already used your annual exemption on the same person.'
You can also gift up to £5,000 to a child tax-free or £2,500 for a grandchild if they are getting married.
However, families with modest pensions and assets likely won't be affected by the changes, so don't give away any money unless you are sure you can afford to.
Get life insurance
Another way to ensure your family does not foot an IHT bill is to take out a life insurance policy.
Mr Smith said you could use any extra income to pay the premiums, and this will pay out a lump sum to cover your IHT bill when you die.
"You basically pay it at a discount, as what you pay in premiums is usually only 40% to 60% of what your beneficiaries would pay in IHT," he explained.
Read our guide to getting protection.
Invest for your children and grandchildren
If you're got children or grandchildren, then you could invest for their future.
You can save up to £9,000 a year tax-free into a Junior Isa - they will thank you for this in the future.
A £50 a month investment could grow to almost £18,000 in 18 years - a nice chunk of cash for your loved ones.