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Daily Mail
28-05-2025
- Business
- Daily Mail
I'm 80 and want to move in with my son and his family, will it create a tax trap?
My wife and I are 80. What are the tax implications and pitfalls, if we sell our house and buy another jointly with my son and his family in order to live together? What can we do to mitigate these? A.S, via email SCROLL DOWN TO ASK YOUR FINANCIAL PLANNING QUESTION Harvey Dorset, of This is Money, replies: Moving in with family can help people see enjoy their later years in comfort, with the help they need along the way from loved ones. Having grandparents on hand can also be a vital help for working parents too. Intergenerational living won't be without its tricky moments but it is a great way to spend precious years together as a family and see more of your grandchildren. It also allows families to pool their financial resources and potentially get a home, space or location, that they might not be able to alone. You are right to check up on the tax implications though, as this kind of joint ownership can have an impact on everything from stamp duty to inheritance tax. You don't state how much your existing home is worth or what the new one will cost. The financial advisers we spoke to explained this will make a difference to whether you need to worry about inheritance tax and how complicated things may be. Ian Dyall, head of estate planning at Evelyn Partners, replies: The two taxes you need to be aware of are inheritance tax and a form of income tax called 'pre-owned asset tax', which was introduced in 2005 as an anti-avoidance measure to target people who were managing to sidestep the inheritance tax rules. Let's talk about the principles of inheritance tax first and then we can apply it to your case. If you reduce the value of your estate by making an outright gift, that will only be effective in reducing your inheritance tax liability if there is no 'reservation of benefit'. You also generally need to survive the gift by seven years before it ceases to be included in your estate unless it is covered by one of the exemptions. A reservation of benefit occurs where you continue to use or benefit from an asset that you have given away, for example giving away a property but continuing to live in it. In your case, whether there is a deemed lifetime gift for inheritance tax will depend on who pays for the new property and how it is owned. If you take the proceeds of your current home and use it to help purchase the new property, but the property is owned solely by your son and his wife, then a gift has happened for inheritance tax purposes. However, if you then live in that property rent-free, it is likely to be treated as a reservation of benefit for inheritance tax purposes. The value would remain in your estate and will be liable to IHT on death, irrespective of how long you live after making the gift. If the new property is co-owned with your son in proportion to how much each of you have contributed, then there would be no gift and only your share of the property would be liable to inheritance tax on your death. If the property were solely owned by your son and his wife, you could avoid the reservation of benefit by paying a market rent for your use of part of the property. You would need to get a professional to determine a fair rental value of your use of part of the property, and your son would be liable to income tax on the rent, but in some cases that may be worth paying if you think you are likely to live seven years but not an excessive period beyond that. If you no longer own a share of a property on death, you may be worried that you will lose the 'residence nil rate band', which is an inheritance tax allowance that can be used if you leave your home to your children and grandchildren on death. However, 'downsizing provisions' exist to allow people to downsize or sell their home later in life without losing the allowance, so you should not lose any of the allowance that you would have been entitled to. Make sure you get ownership set up properly Patrick Haines, partner at Partners Wealth Management, replies: There should be no tax issues (other than potentially stamp duty) on the planned move to the new 'family home'. For inheritance tax purposes, you may have available a tax-free nil rate band each of up to £325,000 and an additional tax-free residence nil rate band each of up to £175,000 (certain conditions apply to the latter). This can provide a tax-free estate of up to £1million. Where your estate is valued within the above limit, there may potentially be no inheritance tax due on your estate on the last to die and your son and family could ordinarily live with you in the meantime without any tax implications. A properly drafted will should be arranged. For larger estates, inheritance tax is usually payable at 40 per cent on your estate in excess of these allowances. In this case, there are further considerations and these relate to how the property is legally owned from outset and also your life expectancy. To meet your objectives, the ownership of the property in this case could be arranged as tenants-in-common where you will typically own 50 per cent and your son would own the other 50 per cent. We would recommend an equivalent sharing of the running costs as well. You could then take advantage of a co-ownership discount, which HMRC permits where the co-owner is not a spouse or civil partner. Your son can remain in occupancy for a discount to apply. On the successful application following the death of the 50 per cent co-owners, a discount of up to 15 per cent of the value of the deceased's share can be applied. The other 50 per cent owners would continue to own their share. In our example, if you as parents pass away within seven years, the 50 per cent share you have given to your son on the purchase of the new property would fall back into your estate. Where the total estate value exceeds the available nil rate bands, then inheritance tax may be due on the excess. The gift to your son of the 50 per cent share is called a potentially exempt transfer (PET) and this gift will fall outside your estate for inheritance tax if you survive a seven-year period. For 'failed PETs' where the 50 per cent gift to your son is in excess of the available nil rate bands of £325,000 each, taper relief may apply to the excess which can reduce the tax payable. Be mindful that the inheritance tax on any failed gifts might need to be met by the beneficiaries. Inheritance tax on jointly owned property is rarely straightforward and whether or not tax has to be paid will depend on several factors, including the status of the person inheriting and their relationship with the deceased, how the property was jointly owned, the type of the property concerned and details of occupancy. Caution: tax planning around the main residence and joint property ownership can be fraught with danger, particularly where circumstances change or relationships deteriorate so professional legal advice from a qualified solicitor is strongly recommended. Help with financial advice and planning Financial planning can help you grow your wealth, sort your pension, or make sure your finances are as tax efficient as possible. A key driver for many people is investing for or in retirement and inheritance tax planning. If you are looking for help sorting your finances and want to work out whether you need advice, planning, or coaching, the following links can help you understand more: >Do you need financial planning or financial advice - and is it worth it? > Financial advice: What to ask and how much it might cost > Are you retirement ready? Take our quiz and get financial planning help > Inheritance tax planning - what you need to know to protect your wealth What is pre-owned asset tax? Ian Dyall adds: If you sell your property and give the cash to your son who uses the money to buy a property in his name, which you then live in, there is an argument that the reservation of benefit rules do not apply. In this case you could be liable to pre-owned asset tax. This is an income tax charge paid annually on the perceived value of your occupation of the property. You can avoid it by electing to have your contribution towards the property treated as a reservation of benefit, or again by paying a market rent. Its application is complex and it is easy to unwittingly fall within the scope of the tax through actions driven by motives unrelated to tax planning. The bulk of UK wealth is held in people's homes, so successive governments have made it difficult to mitigate the inheritance tax liability on your main residence, introducing new legislation to block loopholes when necessary. If your share of the new property is worth less than the proceeds from your existing home, then planning with the funds you have released by downsizing may be the simplest approach to mitigating inheritance tax. Get your financial planning question answered Financial planning can help you grow your wealth and ensure your finances are as tax efficient as possible. A key driver for many people is investing for or in retirement, tax planning and inheritance. If you have a financial planning or advice question, our experts can help answer it. Email: financialplanning@ Please include as many details as possible in your question in order for us to respond in-depth.
Daily Mail
19-05-2025
- Business
- Daily Mail
EXCLUSIVE Could you fall into the pension inheritance tax trap? We reveal how four families could face huge bills
Inheritance tax has historically been something only the very wealthiest pay, but we can reveal the huge tax bills families could be saddled with by 2030 thanks to a looming raid on pensions. Frozen thresholds combined with rising asset prices, including the value of homes, investments and savings, are already dragging more into death duties. But a massive change to how estates are calculated is on the cards, with pension pots due to be included from 2027 - and this will bring far more families into the inheritance tax net and drive up their bills. Some families will end up paying tens or even hundreds of thousands of pounds more in inheritance tax. To illustrate the impact, exclusive figures for This is Money from wealth management firm Evelyn Partners show how four example families who would currently have small, or in one case no inheritance tax liability, could instead face hefty tax bills by 2030. We look at what an IHT bill will cost now and what it is likely to increase to within five years, once changes have filtered through. Ian Dyall, head of estate planning at Evelyn Partners says: 'These imaginary but realistic case studies illustrate the inheritance tax liability impact of both asset value inflation against nil-rate bands that are frozen until at least 2030, and crucially the pensions rule change that is due to come into force at the start of the 2027/28 tax year.' Currently, unspent pension pots are considered outside of people's estates for inheritance tax purposes. But from April 2027, the Government wants to include them under plans announced by Rachel Reeves in her Autumn Budget. This could potentially lead to double taxation and rates as high as 67 per cent on unspent pots. This is due to current income tax rules on inherited pensions that differ depending on the age at which someone dies. If you die before age 75, the beneficiaries of your pension can take the pot free of income tax. But if you die after the age, beneficiaries pay income tax on withdrawals from inherited pensions. Adding inheritance tax at 40 per cent to the latter case too, would lead to double taxation and sky-high marginal rates on withdrawals. It's likely that one in 10 estates will soon be in the IHT net - with the Treasury forecast to rake in £14.3billion extra between now and the 2029-30 tax year. Below, we lay out four hypothetical scenarios to illustrate how the inclusion of pensions for IHT purposes will create financial headaches for many families. Inheritance tax: How it works Inheritance tax is levied at 40 per cent on estates above a certain size. Your estate is the term given to all the things that you own at death. Valuing this involves adding up everything, from your stake in your home, to your savings and investments, your car and your personal belongings. As an individual, your estate needs to be worth more than £325,000 for your loved ones to have to stump up inheritance tax. This can be doubled to £650,000, jointly, for married couples or civil partners, who have not already used up any of their individual allowances. A further crucial allowance, the residence nil rate band, increases the threshold by £175,000 each for those who leave their home to direct descendants. This gives a total potential extra boost of £350,000 and creates a potential maximum joint inheritance tax-free total of £1million. But the own home allowance starts being removed once an estate reaches £2million, at a rate of £1 for every £2 above the threshold. > Essential guide: How inheritance tax works Four families and how they could be hit for IHT Our table highlights the four example families, with their inheritance tax position now and the situation they could find themselves in from 2030. The blue line in the table represents their assets and the total value of their estate now, while the green line shows this in 2030 after assets have risen in value and pension pots have been included. The column stating Taxable Estate shows how much of it would incur inheritance tax now and in 2030 once pension pots are included (the Smiths negative figure shows they currently are below the inheritance tax level). The IHT Due column shows the tax bill now in blue and the future potential tax bill in green. We explain the scenarios in more detail below. Scenario one: The Smiths, late 30s A couple in their late 30s with a young family might not be considering inheritance tax as an issue at this stage of their lives. But it's important to remember that, however morbid the thoughts involved, families can be left with a huge tax bill at any age if disaster strikes. Often people don't think about IHT until it's too late and little can be done to mitigate the potentially hefty charge, so those who could be pushed over the limit should seek advice, whatever their age. Our figures from Evelyn Partners show how the children of a couple in their late 30s, who would not have to pay IHT if their parents both died today, could face a hefty bill in five years. In our scenario, the Smiths' own a £750,000 house, with £400,000 left on their mortgage and £500,000 in defined contribution pensions between them, with both contributing £500 a month. They have also saved £50,000 into their Isa and £20,000 in cash. This means their total assets add up to £1,320,000, but their estate is valued at £420,000 after deducting mortgage debt (£400,000) and their combined pension pots of £500,000. Under the current IHT rules, this couple are well within their combined £1million nil rate band and residence nil rate band allowances, with £580,000 to spare, which means their estate wouldn't face any inheritance tax. Looking to the future, Evelyn Partners assumed the assets appreciate by 5 per cent a year, except cash savings, which increase by 2.5 per cent annually. Their mortgage will reduce as repayments continue and their pensions grow due to investment returns and contributions. This means the family's home would be worth £962,520 in 2030, while their repayment mortgage would have been paid down to £300,000, and their pension pots would be worth a combined £709,685. Their Isa and savings pots will have increased to £64,168 and £22,660, respectively, assuming no further contributions between now and 2030. The Government's plan to pull pensions into inheritance tax, along with growth in the family's assets, radically change their IHT position. By 2030, their estate has more than tripled to £1,459,033, once their £300,000 mortgage debt is deducted. This leaves £459,033 of their estate above the inheritance tax-free allowances, meaning that they could owe £183,613 in IHT. Scenario two: The Murrays, mid-50s Our second couple are the Murrays, who are in their 50s with grown-up children. They're wealthier than the Smiths, with a more valuable home and bigger combined pension pots. Their £1million home (£900,000 of which is mortgage-free) and £1million in pension pots, plus £100,000 in Isas and £50,000 in cash, bring their total assets to £2,150,000. Today, inheritance tax isn't a major concern as they are just over the limit. Deducting their mortgage debt and pension pots brings their total estate to £1,050,000, with their taxable estate at £50,000 after the IHT allowances. This means this £50,000 chunk of their estate would currently be liable to a 40 per cent IHT bill of £20,000, because their pension pots are not included. However, in five years, this family could face an inheritance tax charge of more than £800,000, primarily because of the pensions raid, along with fiscal drag from frozen thresholds. Assuming this family's assets had appreciated by 5 per cent annually, with cash savings up 2.5 per cent each year, and their mortgage now fully paid off, their total assets would be £2,846,914. As the couple's combined estate exceeds £2.7million, on the second death the residential nil rate band benefit would be fully tapered away. With this gone their inheritance tax-free allowance is only £650,000 rather than £1million. Their taxable estate in 2030 could now be £2,196,915, rather than the current £50,000, leaving their beneficiaries with a bill of £878,766. Scenario three: The Taylors, late 60s The Taylors are a retired couple in their late 60s with total assets of £2,650,000. They live in a large detached home in the South East that is worth £1.25million and they cleared the mortgage on it some time ago. Many of their generation had defined benefit pensions, which are lost on the second spouse's death, but the Taylors built up defined contribution pensions instead and have combined pots worth £1.25million. Alongside, this they have £100,000 in Isas and £50,000 saved in cash. Their £1,250,000 combined pension pots are currently exempt, which means that their estate is worth £1,400,000, with a taxable estate above the IHT threshold of £400,000. This leaves their adult children - they have no grandchildren - with a £160,000 inheritance tax bill if they were both to die today. However, by 2030, their estate could be worth £3,004,200, assuming their pensions and savings maintain their monetary value as they draw on them. If both of the Taylors died in 2030 they would still be under the age of 75, which means that their pension funds will not be liable to income tax when their beneficiaries withdraw funds. But their pension pots will now be included for inheritance tax purposes. Like our couple in their 50s, they only qualify for the £650,000 nil rate band and not the residence nil rate band because their estate is now valued at over £2.7million. This means that their taxable estate is £2,354,200 with an IHT bill of £931,680. Scenario four: The Joneses, over 75 Our last retired couple are in a similar financial position to our previous family, the Taylors, but by 2030 will be over the age of 75. This means their pension beneficiaries - their adult children and grandchildren - will have to pay income tax at their marginal rate, if they withdraw funds from the inherited pots. While their £1,500,000 house will have increased in value to nearly £2,000,000, we assume their pensions, investments and savings have now been reduced. However, growth in their home's value along with adding the remaining pension pots, means their total estate for IHT purposes will have increased from £1,650,000 to £3,035,040. Currently, their taxable estate above the combined £1million inheritance tax threshold is £650,000 with a tax bill of £260,000. In 2030, the value of their estate, now including the remaining pension, will have exceeded the amount that allows the family to claim the residence nil rate band. This means that their taxable estate will soar to £2,385,040 with the beneficiaries left liable to pay £954,016 in IHT. But there is a double whammy, as they die after the age of 75, their beneficiaries will face inheritance tax on their pension pot - and pay income tax on withdrawals. Ian Dyall says: 'This means that on the £600,000 of inherited defined contribution pension cash remaining after £400,000 IHT has been removed, the beneficiaries – if higher rate taxpayers – could have to pay a further 40 per cent or £240,000 in income tax, leaving just £360,000 from a £1million pension pot. 'However, one thing in this family's favour is that the elderly parents have spent (and/or possibly gifted) some of their savings, Isa and pensions, thus limiting the IHT liability at death, leaving it only marginally greater than the third family. How can you lower your pension raid IHT bill? These case studies show how quickly families will be hit with a huge IHT liability once pensions are included within people's estates. The seven-year rule on gifts, after which they pass out of your estate for IHT purposes, has not yet been changed, so gifting can be one way to lower your bill. Dyall says: 'Our case studies also illustrate the potential power of spending or gifting savings to limit an IHT liability, particularly in a situation where unspent pension pots are subject to IHT. You can gift £3,000 a year, plus unlimited small gifts of £250, free from IHT, and spouses and civil partners can give each other any sum tax-free. Gifts can be made beyond this but the person making them must survive seven years for them to fully come out of the inheritance tax net, tax would be incurred on a sliding scale in the meantime. There is also an inheritance tax exemption for regular gifts made out of surplus income, which some may consider. Record keeping and proper research is vital here. Dyall says that spending more of their pension could prove to be a wise move for many, who could otherwise face big bills. 'That is not to say of course that elderly savers with unspent pension assets should start to withdraw suddenly and splurge,' says Dyall. 'Everyone will sensibly want to make sure they retain access to enough funds to have a comfortable retirement and to pay for social or residential care if it becomes necessary. 'But pensions after 2027 are likely to return to their primary purpose of funding retirement and as such are savings that can be spent or given away by the saver - with one eye on the income tax consequences. 'I sometimes say to certain clients, "Think of it like everything you use this money for comes at a 40 per cent discount"'. 'But they still need a good retirement plan that shows them how much they can afford to spend and / or gift in various circumstances, and for that it is hard to beat professional financial planning advice, which will provide cash flow analyses for different scenarios.'
Telegraph
18-05-2025
- Business
- Telegraph
Why more grandparents are tearing up the inheritance rulebook
Are you changing your inheritance tax planning? Let us know at money@ Grandparents are tearing up the inheritance rulebook, choosing to skip a generation and pass wealth straight to their grandchildren. 'People are living longer and dying later, their children are further on in life and usually broadly financially sorted, so don't actually need the money,' says Ian Dyall, of the wealth manager Evelyn. 'Meanwhile, their grandchildren have university debt, are trying to get on the housing ladder and don't have the same pensions. Giving them a financial start in life has more of an impact.' One in four people over 50 have given substantial cash gifts to family in the last five years, according to the SunLife Life Well Spent report, and 36pc of over 70s. The average amount given is £20,021. And while children are still the beneficiaries of many gifts, grandchildren are increasingly feeling the benefits of the great wealth transfer. Some 22pc of over 50s, and 34pc of over 70s, have given large cash gifts to their grandchildren. These included money for a special occasion such as a birthday or Christmas (40pc), to put towards tuition fees (38pc) or to help after the birth of a baby (27pc). Financial gifts are expected to further snowball after the Chancellor Rachel Reeves announced in her maiden Budget that pensions will be liable for inheritance tax from April 2027. Savers who had previously planned to leave their pots untouched to pass on to loved ones are now having to consider the best way to spend their money. 'My children don't need any gifts' Blair Hilton is building a nest egg for each of his five grandchildren. Hilton, 80, who lives in Thornby, near Liverpool, has a monthly income of about £4,000 after tax from his state pension and a defined benefit pension from his career as a civil servant. He has set up a bare trust for each of his grandchildren, aged one to 14, and splits any excess money each month, after his bills are paid, between them. 'I didn't discuss it with my children before setting up the trusts, the idea came up when I was talking to my financial adviser, ' says Hilton. 'But when I mentioned it to my children, they seemed happy with the arrangement and thought it was sensible.' His children will inherit an equal share of his house, worth about £400,000. 'They have their own homes and are working, so they're not in need of any gifts,' he says. 'And while the money is going to my grandchildren, I still expect it to benefit my children because it will go towards university fees that they might otherwise have had to pay.' Individuals can give away up to £3,000 a year, and this falls immediately outside an estate for inheritance tax purposes, plus as many gifts of up to £250 as you like, as long as they go to people who do not benefit from your main gifting allowance. But larger sums are subject to inheritance tax unless the donor lives for seven years after making the gift. Under the surplus income rule, you can give away excess cash inheritance tax-free as long as it does not impact your standard of living. This must be regular income from certain sources such as employment, rent, pensions or dividends (it can't come from savings) – the donor must keep good records and show a regular pattern of gifts. But it is an underused strategy – only 430 families claimed this exemption in 2022-23, according to official figures. 'When you look at the inheritance tax rules, it is hard to give money away when you don't know how long you will live, so this seemed like a far better option,' says Hilton. He is single and wants to reduce his wealth so that his family are not left with a large inheritance tax bill after he dies. He has made gifts to family in the past 10 years, but is conscious of the seven-year rule. 'Tax efficiency is the main reason I'm doing it. In the past I have given money away, but it is hard when you don't know how long you will live,' he says. 'I want to get my assets down to the £325,000 threshold, but the amount you can give away per year is fairly limited.' Hilton invests the money for his grandchildren through his wealth manager, Bestinvest, in the Evelyn Growth Fund Clean, which invests in a portfolio of other funds with the aim of achieving long-term growth. Top holdings include Evenlode Global Income, Fundsmith Equity and Invesco Physical Gold ETC. It can also be more tax efficient to give money to grandchildren, says Chris Etherington, from the accountancy firm RSM. 'Parents who invest money for their children, other than through a junior Isa, are taxed on any gains above £100. This does not happen when you give money to a grandchild.' The best strategy depends on individual family circumstances. Etherington gave the example of one recent client with two children, one a high earner and one a lower earner. 'They will leave money to the lower earning child, but skip the high earner and instead pass money to his daughter,' he said. Far from creating a family drama, Dyall says that parents getting 'skipped over' are often happy for their own children to inherit. In some cases, parents who inherit money use a deed of variation to alter the will and redirect money to their own children. 'I don't need a lump sum' Cara Sayer has asked for any inheritance she might receive to be left to her daughter Holly, 17. 'I've got my own house, a business that is doing really well, and I'm building a nest egg with my pension – so I don't need a lump sum, ' said Sayer, 53, who founded the baby products company SnoozeShade. Sayer, who is single, is frustrated that it is harder for those who are not married to pass on money. Under the current rules, a married couple can potentially pass on £1m tax-free between them (as long as their estate is worth less than £2m) – but for a single person, that threshold is just £500,000. Sayer has asked her mother, Mary, 79, to consider Holly next time she updates her will. She hopes that Holly would use a lump sum to buy a first property. 'She already received a small inheritance and used it to buy her first car, so she would be under strict instructions about what it could be used for – and I like to think that if I did need the money, she would help me.' She adds: 'Ultimately it's up to my mum, and no one should be told what to do with their own money, but I think we should give more thought to the tradition of just passing everything straight to your children and whether it will actually benefit them as much as you think.' Avoiding a dispute But matters of inheritance can be fraught. Some 18pc of people have had a dispute within their family about inheritance, according to a survey of 2,000 adults by Canada Life. It found that 10pc of those aged 55 to 64 were relying on an inheritance from their parents to fund their own retirement. Yet under English law, individuals are free to leave their money to whoever they choose, says Dyall, meaning that some adult children could be left disappointed. 'We had one case where money had been left to a child under age 18 and the parent was named as trustee, and we were not convinced the money was being used for the child's benefit,' he recalls. Grandparents concerned about their wishes being carried out could find that giving money away during your lifetime tends to be less contentious, he adds. An alternative option is to write a discretionary trust, where you can provide a letter of wishes for the trustee, who can be a trusted friend or relative, or a professional, instructing them to prioritise whoever needs the money most. Dyall adds: 'My advice would be to have the conversation with your children first. Explain that it is not that you don't love them, but that the money could cause them potential tax problems and is likely to benefit the grandchildren more. 'If you don't want to have that talk, then consider writing a letter alongside your will to explain your rationale.'
The Independent
24-04-2025
- Business
- The Independent
Inheritance tax rules have changed - here are three ways to give gifts without creating a big bill
With inheritance tax (IHT) bills rising fast, giving financial gifts to your loved ones early could be a great way to reduce your inheritance tax bill. Last tax year, IHT revenues hit a record high of £8.2bn, according to new HMRC figures. And recent budget changes could drag thousands more into the tax net: from April 2027, pension wealth will be subject to inheritance tax for the first time. It's a major shift that's expected to affect 153,000 estates between then and March 2029, according to OBR figures. With more of us due to pay inheritance tax over time, passing on wealth early could help you save a big tax bill down the line. How is inheritance tax changing? Pension wealth is currently exempt from inheritance tax, but from April 2027, it will be counted as part of your estate when you die, along with your other assets. It's a significant change that could see pension savers paying thousands more on wealth they pass on to their loved ones. Final salary pensions won't be affected - the change impacts those of us who have a defined contribution pension, where you build up a pension pot to spend during retirement. This shift will push even modest earners into paying IHT for the first time. The tax-free nil-rate band stands at £325,000, so a family inheriting a house worth £300,000 and a pension pot of £150,000, could end up owing £50,000 inheritance tax. With inheritance tax bills increasing, giving gifts to your loved ones during your lifetime is one of the simplest ways to reduce your inheritance tax bill. But you need to watch out because any gifts you make within seven years of your death could still be subject to inheritance tax, landing your relatives with a bigger tax bill than expected. Ian Dyall, head of estate planning at wealth manager Evelyn Partners, explains: 'The overriding rule is, along as you live for seven years you can give away as much as you want, as at that point any gift will be counted as having left the estate and will be exempt from IHT. But the important caveat here is that you cannot continue to benefit from the gift after having given it away. However, there are also certain exemptions which mean that the amounts gifted leave the estate immediately.' There are several allowances that allow you to give smaller regular gifts without the risk of an IHT bill if you die within seven years. Giving regular small gifts Giving small regular gifts is one of the most tax-efficient ways to pass on wealth. Here's a summary of the rules: You can give away £3,000 each tax year, and it won't be counted as part of your estate when you die as it falls within the annual gift allowance You can give multiple small gifts of up to £250 each year to anyone, provided you haven't used another allowance for the same person When a relative gets married, you can give extra gifts - £5,000 to your children, £2,500 to your grandchildren and £1,000 to anyone else All these gifts will be free from IHT, even if you die within seven years. In addition, there's a little-known rule that can pack a big punch when it comes to IHT planning - it's known as 'gifts out of surplus income.' It allows you to give away money from your surplus regular income - someone who takes home income of £40,000 but spends £30,000 would have £10,000 'surplus income'. Ian Dyall explains that, 'This must be treated with care as it is bound by tight rules and needs to be well recorded, but essentially means that you can give away regular amounts if they come out of excess income (and only income) that is not needed by you to maintain your standard of living.' Depending on your income and expenses, this rule could allow you to give away more than £3,000 each year, saving a big IHT bill down the track. But you do need to keep careful records to prove the gifts came from your surplus income. Not keeping records could mean your relatives end up paying IHT on any gifts you made within seven years of your death. Writing a tax-efficient will In addition to making lifetime gifts, it's vital to have a will that reflects your current wishes. Consulting with a solicitor can provide valuable guidance on inheritance tax and how to optimise available allowances. Yet worryingly, more than half (53 per cent) of UK adults aged 50–64 don't have a will, according to the Money and Pensions Service. That means more potential stress for relatives, as there are no clear instructions about where their money should be distributed. Louise Cardwell, partner at Ashtons Legal, emphasises the importance of expert advice from a specialist solicitor on inheritance tax matters. They focus on 'helping clients reduce their tax liability through tailored legal strategies such as trusts, lifetime gifts, and tax-efficient wills. This is especially important after any budgetary changes,' she added. When investing, your capital is at risk and you may get back less than invested. Past performance doesn't guarantee future results.
Daily Mail
23-04-2025
- Business
- Daily Mail
Inheritance tax receipts soar to record high as experts warn more people will have to pay
Inheritance tax receipts reached another record high in the last tax year, as frozen thresholds dragged more people into the net. The latest HMRC figures show IHT receipts from April 2024 to March 2025 reached £8.2billion, an increase of £800million compared with the same period a year ago. More people are paying IHT as frozen thresholds and rising house prices have pulled them into the net, and experts predict this will only rise with pensions set to be included from 2027. The headline rate of IHT is 40 per cent, charged over the £325,000 threshold, with an additional £175,000 allowance granted to direct descendants. Spouses and civil partners can share their allowance, meaning they can pass on £1million to their children tax-free, and these thresholds are frozen until 2030. Ian Dyall, head of estate planning at Evelyn Partners, said: 'The inheritance tax take for the Treasury has notched up another record financial year. 'That's a trend that is unlikely to change as long as nil-rate bands remain frozen, which is currently until at least 2030.' Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, adds: 'The result is the IHT issue is no longer one for the richest people – it's something that needs to be considered more widely.' Changes announced by Rachel Reeves in the Budget also mean more of people's estates will face the death tax. Pensions will no longer be exempt from IHT, bringing pension pots into a person's estate from 2027, while tax will have to be paid on inheritance agricultural assets worth more than £1million from next April. Reeves might go further, with concern the Treasury might look at lengthening or even scrapping the seven-year gifting rule. Dyall warns: 'The Chancellor might not be done with IHT reform quite yet.' However, recent market chaos might be a silver lining for some families who could be due an IHT rebate if the value of their estate fell during the recent market chaos. Dyall says: 'If their estate was valued on death, say, six months ago and the IHT bill settled on the basis of that, then by the time probate is granted and assets have been liquidated, it could be that the total value of the estate has dropped. 'Executors should check the estate's value at the point it is distributed to beneficiaries and compare this to the estimate given to HMRC when the IHT liability was calculated. It could be that the estate is due some money back from HMRC.' Elsewhere, capital gains tax receipts fell in 2024/25 tax year, their lowest level since 2020/21, after cutting the tax-free allowance and raising the tax rate. 'On the face of it, you might have assumed [it] would mean the Government scooping up millions of pounds more in tax,' says Sarah Coles, head of personal finance at Hargreaves Lansdown. 'However, lower tax-free allowances from April 2023 meant investors realised gains ahead of the cut, so the tax peaked in the tax year earlier at £16.9billion.'
