"Understanding Inheritance Tax: Crucial Information for Families"
In the upcoming years, a significant change is set to occur in the UK's tax system. From April 2027, unused pension funds will become subject to Inheritance Tax (IHT) at a rate of 40%, marking a shift from their traditional tax-free status [1][3].
Currently, most pension funds pass free of IHT, making them a popular estate planning tool. However, this reform could lead to an increase in the taxable value of estates, potentially raising the overall IHT liability for thousands of families [1].
At present, about 75% of estates with pension wealth fall below the IHT threshold and would not be immediately affected. However, around 49,000 more estates are expected to face tax due to the inclusion of pensions [1]. This means families may need to prepare for higher tax burdens on inherited pension benefits.
The government plans to make pension scheme administrators (PSAs) responsible for reporting and paying the IHT on pension components, rather than personal representatives. This move aims to ensure that the tax on pensions is paid without causing delays or requiring estate funds to cover the tax. However, there are concerns that this could delay payouts to beneficiaries, as PSAs might pay on account of the maximum IHT liability to avoid interest charges [3].
With these changes, it's essential for families and advisers to reconsider estate planning strategies to mitigate increased taxation and potential cash flow issues for beneficiaries [1][3].
It's important to note that the main thresholds for IHT will be frozen until April 2030. The residence nil rate band, available to claim on deaths on or after 6 April 2017, offers an additional allowance of £175,000 for homes left to direct descendants, increasing the threshold to a joint £1 million for married couples or civil partners [2].
Gifts given more than seven years before death are free of IHT, and there are ways to find the money to pay IHT upfront or in installments. This can be achieved through specialist loans or insurance policies taken out in advance [2].
Other exemptions from IHT calculations include gifts to charities and political parties, wedding gifts within certain limits, and annual gifts of £3,000 a year, plus unlimited small gifts of £250 [2].
If you die within seven years of giving a gift, IHT is levied on a sliding scale. The residence nil rate band starts being removed by £1 for every £2 above a threshold of £2 million [2].
For more detailed information and advice on various tax topics, you can consult Heather Rogers, This is Money's tax columnist [4].
[1] https://www.ftadviser.com/2021/10/27/pension-income/pension-funds-will-be-subject-to-inheritance-tax-from-2027/ [2] https://www.gov.uk/inheritance-tax [3] https://www.moneyobserver.co.uk/investment/pension-funds-to-be-subject-to-inheritance-tax/article/f73802e7-3e32-4761-81c4-3f5a92a07a6a [4] https://www.thisismoney.co.uk/money/tax/heather-rogers/
\n\n If you have any questions or need further clarification, feel free to ask!
- In light of the upcoming changes to the UK's tax system, seeking professional financial advice on estate planning strategies could be beneficial, as it may help mitigate increased taxation and potential cash flow issues for beneficiaries.
- With the inclusion of pension funds subject to Inheritance Tax (IHT) from April 2027, individuals might need to consider alternative investment opportunities, such as properties or other financial products, to secure their personal-finance future.
- As the tax liabilities on inherited pension benefits could rise, families may want to explore the option of obtaining insurance policies or specialist loans to cover immediate IHT payments or installments.
- When planning for the future, it's essential to consider various financial aspects, such as mortgages, pensions, and investments, to ensure a comprehensive and secure personal-finance strategy, especially in the face of changes in tax laws and regulations.
