Protect your inheritance from Rachel Reeves' pursuit: Advice from SIMON LAMBERT on immediate action you should take
Inheritance Tax (IHT), often referred to as Britain's 'most hated tax', is set to undergo significant changes, particularly in relation to pensions and lifetime gifting rules. Rachel Reeves, a key figure in the UK's financial landscape, is rumoured to be planning another Budget inheritance tax raid.
Reeves' proposals aim to tighten IHT, focusing on two key areas:
- Closing the pension loophole: Starting from April 2027, unused pension funds and death benefits payable from pensions could be brought into the estate for IHT purposes, contrasting with the current system where these are exempt from IHT.
- Introducing a lifetime gifting cap: A possible £100,000 tax-free gift limit over a lifetime is being considered. Gifts beyond this cap could be taxed at 40% from the estate value, marking a shift from the current system where gifts are exempt if the donor survives seven years after making them.
Additionally, the existing 7-year survival rule for gifts to be exempt from IHT could potentially be extended to 10 years, making it harder to pass wealth without tax liability on death.
These proposals differ notably from the recommendations made by the Office of Tax Simplification (OTS) in 2018, which focused on simplifying the IHT system rather than increasing tax burdens. The OTS suggested reducing the complexity of reliefs and exemptions and reforms to make IHT easier to understand, but did not recommend introducing a lifetime gifting cap or changing the 7-year rule duration.
The proposed lifetime gifting cap would severely limit the ability to hand down money, and good records are essential for proving the date and regularity of gifts made from surplus income. Trusts can be used to pass on wealth and beat inheritance tax, but they can incur tax charges, particularly if one wants to keep control over funds.
It's important to note that the frozen main gifting limit means you can only give away £3,000 per year before potentially facing inheritance tax. IHT is levied at a swingeing 40 per cent. Anyone considering using a trust should seek professional financial advice.
These proposed changes highlight the ongoing efforts to address the problems with inheritance tax, which have not been tackled for two decades. As the situation evolves, it's crucial for individuals to stay informed and seek professional advice to navigate the complexities of IHT.
- Rachel Reeves' plans for the upcoming Budget include tightening Inheritance Tax (IHT), specifically focusing on closing the pension loophole and introducing a lifetime gifting cap.
- Under the proposed changes, unused pension funds and death benefits payable from pensions could be subject to IHT, contrasting with the current system where they are exempt.
- The proposals also suggest a possible £100,000 tax-free gift limit over a lifetime, with gifts exceeding this cap potentially being taxed at 40%.
- The existing 7-year survival rule for gifts to be exempt from IHT could potentially be extended to 10 years, making it harder to pass wealth without tax liability on death, and highlighting the importance of maintaining accurate records of gifts made from surplus income.
