How Inheritance Tax Reforms Could Impact Your Estate and Financial Planning

Speculation is growing that next week’s budget could include significant changes to inheritance tax (IHT) as a way to raise billions of pounds for government coffers.

Currently, only about one in 20 estates in the UK is subject to IHT, but it remains a controversial topic. Some policy analysts argue that the existing rules contain loopholes that allow wealthier individuals to avoid paying their fair share, while others urge the government to avoid increasing what they refer to as a “death tax.”

What is inheritance tax?

Inheritance tax is a tax levied on a person’s assets—such as property, possessions, and money—after they die, but only if the estate exceeds a certain value. The standard rate is 40%, and it is applied to the portion of the estate that surpasses the tax-free threshold, which is currently set at £325,000.

The rules governing IHT can be complex, as there are numerous tax-free allowances, reliefs, and exemptions for things like agricultural land, businesses, shares in certain stock markets, and pensions. These measures can reduce the overall IHT bill or eliminate it altogether. Seeking guidance from a top financial adviser or independent financial adviser near me could help families navigate these complex regulations and maximize tax efficiency. A certified adviser can provide professional advice on how best to plan for inheritance and pension protection, helping you ensure your loved ones benefit as much as possible.

Who pays it?

In the 2021-22 tax year, about 27,800 deaths resulted in an IHT bill, representing 4.39% of all deaths in the UK that year. The tax generated nearly £6 billion in revenue for the government.

However, the £325,000 threshold has remained unchanged since 2009, and it is expected to stay at that level until at least April 2028. Due to rising property prices and increasing investment values, more estates are becoming subject to IHT—a phenomenon known as “fiscal drag.” In the 2023-24 tax year, IHT raised a record £7.5 billion.

The average amount of IHT paid by affected estates in 2021-22 was £215,000, although this figure was skewed by larger payments from wealthier estates. Despite the headline rate of 40%, the average rate paid by those subject to the tax in 2021-22 was only 13%, thanks to various allowances and reliefs.

This lower effective rate is part of why some believe there is potential to raise significant additional revenue by reforming the system. If you’re considering inheritance planning, finding a financial advisor near me who offers the best service and transparent fees can be essential in minimizing your tax burden.

What changes might be introduced?

The government could consider adjustments to the allowances, exemptions, and reliefs currently available. For example, tax breaks related to spouses and civil partners may be reviewed. Consulting with an independent financial adviser can help individuals understand how changes to the rules might affect their estate. This is especially important for those looking to ensure the best financial protection for their heirs.

Under current rules, you can leave your estate, including property, to your spouse or civil partner without incurring IHT. In addition, the residence nil-rate band (RNRB), currently set at £175,000, can increase the tax-free threshold if the home is left to children or grandchildren. This means a married couple can pass on up to £1 million tax-free to their heirs when the second partner dies.

Any changes to these provisions could significantly impact the tax liability for many families, particularly those in areas with high property values. It’s crucial to find a certified financial advisor who can guide you through these complexities and offer tailored advice.

What about gifts?

There is also speculation that the rules around gifting may be tightened. Presently, individuals can give away up to £3,000 annually without affecting their IHT liability, and gifts given more than seven years before death are exempt from IHT.

One possible reform is extending the seven-year period to 10 years. This would mean more people receiving gifts could face a tax bill further down the line. Additionally, the government might introduce a lifetime cap on the amount that can be gifted tax-free or impose taxes on gifts over a certain value.

For those who plan to give gifts to their heirs, working with a financial adviser who specializes in estate planning and tax efficiency could help avoid unexpected liabilities. Many individuals are searching to find the best financial adviser near me to ensure their estate plans remain effective despite potential legislative changes.

What about investors?

Potential changes to IHT relief on investments have also been discussed. Currently, investments in smaller companies listed on certain markets can qualify for 100% IHT relief if held for at least two years.

Proposals include removing this exemption altogether, reducing the relief, or extending the required holding period. Ending this tax break could raise over £1 billion annually. Those with significant investments should consider consulting a financial advisor to reassess their portfolios and ensure they retain the best financial protection for their assets.

Could family farms and businesses be impacted?

There are reports that the government may target tax reliefs that benefit family farms and businesses. Business property relief and agricultural property relief currently allow individuals to reduce the value of these assets for IHT purposes, sometimes by as much as 100%.

If the government introduces caps on the amount of asset value eligible for these reliefs, it could increase the tax burden on many estates. For example, assets above a certain threshold could be taxed at the standard 40% rate. For families who own farms or businesses, it might be necessary to consult a certified financial adviser near me to explore ways of mitigating potential tax increases and protecting these important assets.

Would changes affect pensions?

At present, pensions are generally excluded from IHT. However, there is speculation that the government could consider taxing pensions upon death, which could bring more estates into the IHT fold and generate substantial additional revenue.

In summary, potential changes to inheritance tax could affect a wide range of individuals, from those leaving property to their children to investors and business owners. The specifics of any reforms will become clearer when the budget is announced, but many are anticipating significant adjustments that could raise billions for the government. If you’re concerned about how this might impact your financial future, now might be the time to seek advice from the top financial advisers who can offer insights and best services tailored to your needs.

Founded in 2017, Fintuity has fast become one of the only digital Independent Financial Advisers (IFA) in the United Kingdom.  Fintuity offers a wide range of financial advisory services including pensions, protection, investments and mortgage advice. The key difference is that as an exclusively digital service, we can offer significant savings and a service that is direct to you and on demand. All rates are correct as of 16 October 2024.