Hurrying to avoid Rachel Reeves' inheritance tax pursuit and safeguard your assets? Experts warn of the expensive, concealed obstacles you should be aware of before acting.
The UK government is contemplating substantial modifications to the inheritance tax (IHT) and gifting rules, as announced by Chancellor Rachel Reeves. These potential changes aim to tighten rules around gifting to curb perceived tax avoidance strategies by wealthier estates and help address a projected £50 billion public financing shortfall.
Proposed Changes to the Seven-Year Rule
One of the key proposed changes under review is extending the current seven-year rule to ten years or even abolishing it altogether. This would increase the tax liability on lifetime gifts made shortly before death. Additionally, there are plans to introduce a lifetime gift allowance, which would cap the amount one can gift tax-free during their lifetime before death, limiting estate planning options.
Modifications to Taper Relief and Immediate Taxation of Large Gifts
The government is also considering modifying or ending taper relief, which currently reduces IHT on gifts made within the seven-year period. Another proposed change is taxing large lifetime gifts immediately above a certain threshold, rather than waiting until death.
Implications for Wealth and Estate Planning
These reforms could significantly impact wealth and estate planning for individuals intending to transfer wealth to family and others during their lifetime and after death. It is crucial for individuals to seek professional advice before making any decisions regarding gifting, as gifting too much can risk giving away more than one can afford or needlessly paying income tax.
Keeping Records of Gifts and Seeking Legal Advice
To safeguard finances, inheritance experts urge caution in the face of potential gift restrictions and pitfalls. It is essential to make a written or digital record of gifts, especially any worth over £250 to one person a year, and keep it with your will. Additionally, it is recommended to check the IHT403 form, which executors use to declare gifts after a death, to find out what information will be required.
Pension Considerations and Care Home Costs
Pensions will only be treated as part of estates for inheritance tax from April 2027, so some advisers suggest waiting until then before deciding whether to act. Withdrawals at the higher rate income tax threshold could lead to a 40% income tax bill, which is the same as the inheritance tax bill. It is important to remember that care home fees can be colossal and can rack up quickly, so it is crucial to ensure that one has enough left to cover their own costs for the rest of their lifetime.
Other Factors to Consider
Spouses inherit free of inheritance tax, so leaving more or all of an estate to them can delay and minimize the eventual inheritance tax bill. Giving assets and continuing to use them, such as transferring a house to a child and still living there, is also not effective in avoiding inheritance tax. Pension withdrawals to pass on to loved ones may attract income tax if they are not the tax-free lump sum.
In conclusion, the proposed changes to the UK inheritance tax and gifting rules could have a significant impact on wealth and estate planning. It is essential to seek professional advice and carefully consider all factors before making any decisions regarding gifting.
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- In light of the potential changes to the inheritance tax (IHT) and gifting rules, it's advisable for individuals to consider investments in areas like personal-finance, wealth-management, and property, as these changes could impact their savings and long-term financial planning, including pensions.
- As the UK government considers extending the seven-year rule, or even abolishing it, and introducing a lifetime gift allowance, it's crucial to be aware of these proposed changes when planning one's property investments and wealth-management strategies.
- When contemplating gifting strategies, such as properties, in order to avoid potential missteps with the new inheritance tax regulations, it's recommended to seek counsel from financial experts specializing in personal-finance and wealth-management to ensure proper planning and compliance with the changes.
