The UK’s has introduced significant changes to inheritance tax (IHT) that could impact estate planning strategies for many families. Understanding these changes is crucial for those looking to protect family wealth and reduce potential tax liabilities.
What Is Inheritance Tax?
Inheritance tax is levied on the estate of a deceased person, including assets like property, money, and possessions. Generally, estates worth over £325,000 are taxed at 40% on the excess, with certain reliefs and exemptions available for qualifying heirs and assets.
Key Budget Updates Affecting Inheritance Tax
- Threshold Freeze Extended Until 2030 The nil-rate band remains at £325,000, and the residence nil-rate band is capped at £175,000. This freeze means more estates are likely to cross the threshold over time due to rising property values. Families with estates valued close to the threshold may find themselves subject to IHT as a result.
- Inherited Pensions Now Subject to IHT (From 2027) One of the most notable changes is the inclusion of inherited pensions within the IHT regime, effective April 2027. Previously, pensions passed to heirs tax-free, providing a valuable tax-planning tool. However, this change will require heirs to consider potential tax liabilities on pension assets.
- Business and Agricultural Relief Adjustments Relief on business and agricultural property has been modified. The first £1 million of assets can still be transferred tax-free. For assets valued over this threshold, relief is now capped at 50%, leading to an effective tax rate of 20% for higher-value estates. This adjustment aims to prevent large estates from bypassing substantial tax while continuing to protect smaller family farms and businesses.
Inheritance Tax Planning Strategies
To mitigate potential tax burdens, there are several effective strategies for reducing the value of taxable estates:
- Professional Advice: Seeking guidance from a solicitor or estate planner can help tailor tax-saving strategies to individual needs, especially given the complexities of the latest budget.
- Gifting: Individuals can gift up to £3,000 annually without affecting their IHT allowance. Additionally, regular gifts from surplus income can also reduce estate values.
- Using Trusts: Trusts allow assets to be managed for the benefit of heirs without adding to the taxable estate, especially useful for larger estates or properties.
Conclusion
With these recent updates, understanding inheritance tax and implementing proactive strategies is more important than ever. For tailored advice on IHT and estate planning, contact Hatch Brenner Solicitors, who can help ensure that your is in line with the latest regulatory changes.