Understanding Inheritance Tax: Crucial Information Families Need to Know
In the UK, inheritance tax (IHT) has been a subject of discussion for many families, especially those with significant assets. Here's a breakdown of the current rules and the changes expected from 2027.
From 2027, an important reform will take place. Unused pension funds and death benefits will be included in IHT calculations, potentially subjecting them to up to 40% IHT above the nil rate band. This change removes the previous exemption for pensions, which could result in higher tax liabilities for families inheriting pension wealth.
Currently, the IHT rate stands at 40%, and the threshold for a single person is £325,000, while for a married or civil partnership, it is £650,000. However, these thresholds are set to be frozen until April 2030.
There are ways to reduce the IHT burden. For instance, you can give £3,000 a year, plus make unlimited small gifts of £250 free from IHT. Additionally, unlimited sums can be given to others, but they will fall under the seven-year rule. If you die within seven years of making a gift, IHT is levied on a sliding scale.
Another strategy to lower the IHT rate is to give at least 10% of your net estate to charity in your will, reducing the rate from 40% to 36%. Legal ways to avoid IHT also include gifts, supporting a cause, and bequeathing to charities.
Wedding gifts are exempt, with limits of up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else. Property inherited in high house price spots and those with large pension pots are generally on the hook for the biggest sums.
Executors or administrators have six months to calculate and pay IHT. Specialist loans and insurance policies can be used to pay IHT upfront. Gifting or bequeathing money to charities and political parties is excluded from IHT calculations.
It's important to note that a political party must have at least one MP elected to parliament to qualify for this exemption. Inheritance tax must be paid before the executors or administrators are granted probate.
The pending inclusion of pensions in the calculations from 2027 will impact more families. Currently, only the richest 4% of families pay IHT, but this is expected to rise to 8% when pensions start being counted towards the levy. This reform could affect approximately 10,500 estates annually, out of around 213,000 with pension wealth, and an additional 38,500 estates will pay more tax than before. The average additional tax liability due to including pensions is estimated around £34,000 per affected estate.
IHT is widely loathed by the public, and there are ways to mitigate its impact. Understanding the rules and strategies can help ensure that your loved ones receive the maximum inheritance possible. For more detailed information, refer to the links provided.
References: 1. Blacktower FM 2. Gov.uk: Reforming Inheritance Tax on Unused Pension Funds and Death Benefits 3. Gov.uk: Inheritance Tax on Pensions: Liability Reporting and Payment
- Seeking financial advice can help you formulate strategies to lower your inheritance tax (IHT) liability as the changes in 2027 will include unused pension funds and death benefits in IHT calculations, potentially raising tax liabilities for families inheriting pension wealth.
- In addition to restructuring your financial strategies, you might consider investing in property, as property inherited in high house price spots may attract a significant IHT burden.
- Decisions regarding personal-finance, such as gifting, taking out insurance policies, or bequeathing to charities, should consider their impact on IHT and the IHT exemptions they offer, such as those for wedding gifts or gifts to charities and political parties.
- To optimize personal-finance management and minimize the IHT burden on your loved ones, it is essential to understand the regulations and follow the rules on the seven-year rule, the charity reduction, and the frozen IHT threshold expected to hold until April 2030.
