Latest news with #deathDuties
Telegraph
02-06-2025
- Business
- Telegraph
Double-digit rise in northerners paying inheritance tax
Northern households are increasingly being caught in the Government's inheritance tax raid, new data shows. Since 2015, there has been a 40pc surge in the number of families in the North West forced to pay death duties due to the Government's frozen thresholds. This was the biggest increase of any region in England. Properties in the north of the country are far cheaper than in the south, yet frozen thresholds coupled with house price inflation mean smaller estates are being dragged into inheritance tax. The top three postcodes which saw the sharpest rise in families paying inheritance tax between 2015 and 2022 were Wolverhampton, Bradford and Dundee, according to data from HM Revenue and Customs obtained by the law firm Irwin Mitchell in a Freedom of Information request. The number of London families dragged into the net rose by only 4pc over the same period. Each individual can leave behind up to £325,000 without paying inheritance tax, however, this tax-free allowance has been frozen since 2009 despite soaring house prices. Had the Government increased the threshold in line with inflation, it would be worth almost £520,000 today. It means families who might not consider themselves wealthy are increasing forced to pay the 40pc charge. The modest rise in Londoners paying inheritance could reflect the use of tax avoidance strategies among the wealthy elite, according to Irwin Mitchell. Despite this, the amount of tax paid by Londoners still leapt by over 40pc due to the number of high value estates in the capital. Families in inner London forked out £831m in 2015, but Irwin Mitchell predicts this will hit £1.6bn by 2026-27. Meanwhile, it expects the tax haul in Wolverhampton to soar from £8m in 2015-16 to £38m by 2026-27 – an increase of 375pc in just over a decade. England has long suffered from a North-South divide, with workers in the South East earning on average £12,800 more than in the lowest paid areas of the country such as Burnley and Huddersfield, according to research from Centre for Cities. The average property in the North West sells for about £250,000, almost half the value of a typical home in the South East. Chris Etherington, of accountants RSM, said the number of northerners paying inheritance tax will rise again because of the changes to business tax relief announced in the October Budget. As part of her maiden budget, Rachel Reeves slashed tax relief for business owners and farmers while also making pensions liable for the 40pc charge, dragging an estimated 10,000 new families into the net. Mr Etherington said: 'There are significant numbers of privately owned businesses in the North that will be impacted by the changes to inheritance tax reliefs from April 2026, and it is inevitable more estates will have a tax bill to pay as a result. 'There are thriving entrepreneurial businesses in the North, in particular in industries such as manufacturing and technology, and many business owners are still unaware of the inheritance tax implications that lie ahead.' This comes as a study by Family Business UK warns that the new inheritance tax rules for family businesses and farmers could wipe almost £15bn off the UK's economic activity. Andy Butcher, of wealth manager Raymond James, said: 'How are business owners supposed to plan for their succession when the business will now likely have to be sold on their death to cover inheritance tax? It's a short-term cash grab which will cause significant damage to the UK economy in the longer term.' Homeowners passing on their main property can claim an additional £175,000 allowance called the residence nil-rate band. Couples can share their allowances which means they can protect up to £1m from the 40pc charge.
Telegraph
02-06-2025
- Business
- Telegraph
‘I'm desperate to invest but afraid of piling more inheritance tax on my daughters'
Receive personalised tips on how to improve your financial situation, for free. Here's how to apply or fill in the form below. Rachel Reeves's inheritance tax raid means it's growing ever harder to escape paying death duties. The Chancellor's decision to strip pensions of inheritance tax relief as well as freezing the nil-rate band until 2030 means the number of estates liable to pay the death levy is forecast to more than double by the end of the decade, according to the Office for Budget Responsibility. John Dixon is hoping to buck the trend. He has so far made few plans for how best to pass on his inheritance to his two daughters, but the death of his late wife Valerie in October has spurred him into action. He says: 'Some of the inheritance tax rules are baffling. I'm concerned if I leave things as they are, I'll find myself in the 40pc bracket [the rate of tax charged on an estate above the threshold] and it's something I desperately want to avoid.' The nil-rate band allows Mr Dixon to pass on £325,000 without incurring death duties, and he can pass on a further £175,000 if he leaves his home to a direct descendant. As his wife's allowance was unused, it means he can effectively pass on up to £1m to his daughters tax-free. But, if Mr Dixon is going to avoid paying inheritance tax, he needs to act quickly. A highly successful career in the telecommunications industry has left the 74-year-old with an extensive portfolio of savings and investments. He has amassed £320,000 in cash savings, including £50,000 sitting in his current account, on which he only earns 2.5pc interest on the first £25,000. He also holds the maximum £50,000 in premium bonds, while the rest of his cash sits in a number of different savings accounts. Mr Dixon also has a stocks and shares Isa worth £53,000 after his wife's funds were transferred to his account. He says he does not regularly make use of the £20,000 tax-free allowance. He says: 'I've got way too much in cash savings and I know it's ridiculous how much is in my current account. I'm desperate to get it out of there and put it somewhere where it can't do any harm in terms of additional taxes.' Additionally, he owns his home outright and had it recently valued at £950,000, and a combination of the basic state pension and two workplace pensions provides an annual net income of around £43,000 a year. As well as a positive attitude to addressing his finances, Mr Dixon is aided by a clean bill of health. 'I am from the North East and we would say 'I'm as fit as lop'. Everything works. I've got my own hair, my own teeth and, bar a few aches and pains of course, nothing desperately wrong.' He also stays fit by playing 18 holes of golf four times a week, something that has provided great comfort. 'Since Valerie died, I found myself playing a lot more because it helps enormously to think about something else and not being dragged back to her death and all of the sadness associated with that. 'Golf has been enormously helpful in that respect and the guys that I play with regularly have also been very helpful and supportive.' Dan Caps, investment manager, Evelyn Partners Based on the figures Mr Dixon has provided, his estate is made up of his home – valued at £950,000 – his cash savings of £320,000 and his Isa of £53,000. All of this brings his estate to £1.3m. Mr Dixon will also need to think about any personal effects and chattels that may need to be considered. Mr Dixon has confirmed that his wife's nil-rate band is unused, and the good news is this will pass to him automatically. Mr Dixon should also be able to benefit from both his and his wife's additional residence nil rate band, which was introduced in 2017. As such, he can pass on the first £1m of his estate free from inheritance tax, while any excess over this level will be subject to inheritance tax at 40pc. It is worth bearing in mind that Mr Dixon would begin to lose the benefit of the resident nil-rate band should his estate exceed £2m on his death, but given the valuation this currently seems unlikely. So, based on the above estate value of £1,323,000, Mr Dixon's current inheritance tax liability is in the region of £129,200. There are several steps Mr Dixon can take to mitigate inheritance tax, and he has already mentioned he is exploring gifts out of surplus income. As Mr Dixon's income exceeds his expenditure, he is able to give away the surplus and this will immediately fall outside his estate for inheritance tax. Mr Dixon should be able to demonstrate that these funds are not necessary to meet his standard of living, and a regular pattern to these gifts helps evidence this. As with all gifts, these should be documented, which will help when it eventually comes to dealing with his estate. In addition to this, Mr Dixon could gift some of the funds he holds in cash or in his Isa, and he tells us he has 'way too much' in cash savings. Larger gifts are subject to the potentially exempt transfer rules, which means they will fall outside Mr Dixon's estate seven years after the gift is made. Before Mr Dixon gives away large sums, he should think whether he may need these funds for himself in the future – to meet any care fees, for example. He should plan carefully and think about talking to a financial planner, who will be able to construct a cash flow forecast for him, which will give him greater confidence when making gifts. There are also lots of other ways to mitigate inheritance tax, including life assurance policies, investments which attract business relief and are free from inheritance tax after two years of ownership, and other smaller annual gift exemptions. All inheritance planning strategies require some form of trade-off and often a combination of a number of different strategies is most suitable. Again, a financial planner will be able to help Mr Dixon review all the options available to him. Gary Steel, senior wealth planner, Canaccord Wealth The first step would be to consider Mr Dixon's current plans given his recent change in circumstances. Does he want to stay in his current home? What changes does he see for himself in the future? We need to make sure he has sufficient funds and flexibility to enable him to live the lifestyle he wishes while also planning for the future. I would also recommend that Mr Dixon reviews his will at this stage to make sure his wealth is passed to his daughters on his death. He should also ensure he has drafted suitable Lasting Power of Attorney documents – a qualified lawyer would be invaluable here. Mr Dixon's wife died less than two years ago, so it should be possible to vary her will – assuming she passed her estate to her husband – to pass some of her wealth to their daughters. This would reduce the value of Mr Dixon's estate for inheritance tax purposes. As well as making gifts from surplus income, up to £3,000 per tax year can also be gifted by Mr Dixon, which is immediately free of inheritance tax. HMRC Form 403 shows how to calculate surplus income. But before making gifts, Mr Dixon needs to carefully consider his own requirements. A key factor is to ensure he has enough money for the rest of his life. A detailed cash flow analysis with a financial adviser will help him explore various 'what if' scenarios, help him make informed decisions and give peace of mind as he moves into the next stage of his life. The remainder of Mr Dixon's cash could be invested to achieve potentially greater returns than bank deposits, as well as keep pace with inflation.
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.'
