On 30 October 2024, chancellor Rachel Reeves delivered her much-anticipated Budget to parliament. Prior to the announcement, the government had repeatedly spoken of a £22 billion “black hole” in the public finances and hinted at tax rises.
As you saw in our recent Budget update, the chancellor revealed several changes that could affect your finances, including an overhaul of certain Inheritance Tax (IHT) rules. Consequently, you may need to rethink your estate plan.
Read on to learn how upcoming IHT changes could affect your estate plan.
Your family’s Inheritance Tax liability could rise in the future as key thresholds remain frozen
In her Budget announcement, Rachel Reeves confirmed that certain thresholds would remain frozen until 2030, and this could mean that your family is more likely to pay IHT in the future.
In the 2024/25 tax year, you can pass on up to £325,000 without incurring IHT. This is your “nil-rate band”. You may also benefit from an additional £175,000 “residence nil-rate band” when passing your main home to a direct descendant such as a child or grandchild.
You can also pass your entire estate to a spouse or civil partner without IHT, and they inherit your unused nil-rate bands. As a result, you could pass on up to £1 million between you.
However, the nil-rate band has been frozen since April 2009 and the residence nil-rate band since April 2020. The previous government confirmed they would remain at their current levels until 2028 and in her Budget, Rachel Reeves extended the freeze until 2030.
Meanwhile, the value of your estate has likely increased in this time. For instance, according to the Land Registry, the average property price in London in April 2009 was £245,351. By June 2018, this had increased to £479,931.
Now, Rightmove reports that the average price of a London property over the past year was £687,026.
As a result, an average-priced home in London could use up both of one person’s nil-rate bands. Even if you inherit your spouse or civil partner’s unused allowances, your home could still use a significant portion of your nil-rate bands, if not all of them.
Additionally, you may have savings and investments that increase in value over time too. Consequently, while thresholds remain frozen, more of your estate could exceed the nil-rate bands, meaning your family pays higher IHT in the future.
It could be harder to mitigate Inheritance Tax as your pensions are no longer exempt from April 2027 onwards
Keeping as much of your pension wealth as possible, and relying on other savings to fund your lifestyle instead, could be a tax-efficient way to pass wealth to your loved ones. This is because pensions are currently considered outside of your estate for IHT purposes.
Unfortunately, Reeves announced that this exemption would end in April 2027 and pensions would form part of your estate for IHT purposes.
This means you might find it more difficult to mitigate IHT in the future and may need to rethink your estate plan. Fortunately, we can support you in finding other ways to potentially reduce the tax your family pays.
You may take advantage of gifting rules or trusts to reduce the tax your family pays on your estate
While you may not be able to use your pensions to mitigate IHT after April 2027, there are other ways you could potentially reduce a large bill.
For example, the first £3,000 you give as a gift each year automatically falls outside of your estate. This is called your “annual exemption”. You can also gift £5,000 to a child or £2,500 to a grandchild for a wedding.
Any gifts in excess of the annual exemption also fall outside of your estate if you survive for seven years after transferring the wealth.
The “gifts from income” and “small gifts” rules may also allow you to make regular cash payments that fall outside of your estate.
We can discuss the most suitable ways to take advantage of these gifting rules, so you can effectively mitigate IHT.
Alternatively, you might explore the option of a trust – a legal arrangement that allows you to pass assets to another party for the benefit of a third party. Once you place assets in a trust, they could fall outside of your estate altogether or you may benefit from a reduced rate of IHT.
That said, trusts can be complex, so you may want to seek professional advice to ensure that you’re being as tax-efficient as possible.
Get in touch
If you’re concerned about how upcoming IHT changes could affect your financial plan, we can support you.
Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.
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.
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