Regardless of your political persuasion, it is probably fair to say that there some trepidation as to the contents of the Labour governments first budget in 15 years. The uncertainty is now over and we have all had a chance to reflect on the opportunities and challenges it present.
This includes changes to the Inheritance Tax rules and ways to mitigate them.
If you are feel some of the areas subsequently detailed in this article might impact upon you, our specialist and experienced Private Client Law Team is on hand to advise you as regards any concerns you may have. To discuss how we can help, please contact your local Kingsfords office in Ashford, Cranbrook or Hythe.
What is Inheritance Tax? (“IHT”)
When somebody dies, IHT is charged at a rate of 40% on the value of any property, money, and/or assets in their Estate over and above a starting threshold of £325,000 per person.
Currently the tax raises the government around £7 billion per annum, with between 4% to-5% of Estates being liable for it. This equates to around 28,000 Estates. Once the fresh rulings are introduced it is anticipated that a further 10,000 Estates may be affected. This follows predictions by the Institute for Fiscal Studies asserting that around 7% of all estates may become liable for IHT by 2032.
Conversely as many as a third of people interviewed under a previous YouGov poll for The Times were concerned that their own Estates will be directly affected by IHT. It is naturally an area of genuine concern for many.
What is the IHT Nil Rate Band?
Any gifts made by the deceased up to seven years prior to their death are subject to IHT on values over and above the combined threshold (allowance) of £325,000. This threshold has been in place since 2009.
What is the Residence Nil Band Rate?
Residence Nil Rate Band (“RNRB”) is an inheritance tax free allowance, applicable to estates where the associated death occurs on or after 6th April 2017. It specifically relates to estates where the deceased owned a property under which through a Will, or the intestacy rules, will have the effect of leaving the property to a “lineal descendant”.
What changes to IHT are to be introduced?
The Chancellor has announced that the existing IHT nil-rate bands will remain in place until 5 April 2028. The Finance Bill 2024-25 details that these levels will be retained for a further 2 years until 5 April 2030.
Accordingly until then the:
- nil-rate band will continue
- residence nil-rate band will continue
- residence nil-rate band taper will continue
Will my pension be subject to IHT?
Currently, any remaining pension funds at death can be passed on to your loved ones and are not counted for IHT calculation purposes. Taxation will however come into play in April 2027 which has left the pensions industry scrabbling to adjust to the new regime.
What about the Farmers?
There has been much public noise regarding the rule changes to small family farms. Land used for rearing animals or growing crops, in addition to farm buildings, houses and cottages have been handed down through the generations, without IHT being applied. Previous governments have appreciated the need to ensure food security for the nation.
Whilst no application of IHT will continue on such assets worth less than £1m, from April 2026, those farms worth in excess of that will be subject to IHT, at an effective rate of 20%. As many smaller farms are asset rich, but cash poor, their ability to discharge any IHT within 6 months could prove highly problematic. Land or assets may have to be hived off and sold, making the farm less viable. As a consequence, Farmers Unions are very concerned that small farms will fail under the new regime, only to be swallowed up by the mega corporation farms. An unintended consequence, or a thought-out policy?
Can I gift my children money before death?
Each of us can give away up to £3,000 per year without paying tax. This is known as the annual exemption and if unused, your allowance can be carried over to the following year, gifting up to a maximum of £6,000. There are other gifting options available to individuals but these need careful consideration and financial and/or legal advice.
Can setting up a trust help?
This is a commonly used tactic whereby parents may set up a trust in favour of any children, placing them outside of any assets they own and in turn, free from IHT. Again, professional advice should be sort.
Contact Us
If you wish to discuss any of the issues raised our experienced, empathetic Private Client Law Team is on hand to advise and support you. Please contact your local Kingsfords office in Ashford, Cranbrook or Hythe. Alternatively, you can send an enquiry and a member of our team will get back to you promptly, by calling us on 01233 665544 or emailing via eai@kingsfords.net or csh@kingsfords.net. We are happy to discuss your concerns without obligation.