Inheritance tax changes are coming – how should you prepare?
Speculation is mounting that the government may charge inheritance tax on pensions and extend the seven-year gifting rule. So how can you make sure you can pass on wealth to the next generation? Duncan Bailey explains
The Budget has given businesses and individuals much to consider with announcements made around spending, national insurance contributions for employers and taxation.
On the latter, we’ve already seen double the number of enquiries since the Budget from clients looking to gift their assets before their death, to avoid increased inheritance tax. With pension inheritance tax changes not coming into force until April 2027 we expect this to increase rapidly over the next few years.
And while 2027 may feel a long while away, the increase in demand for legal services alone means it’s better to act sooner rather than later when it comes to financial planning.
Planned pension tax changes
While pensions are used predominantly to build wealth and prepare for retirement, up until now they have also provided a simple way to leave money to your loved ones, as under the current law you can leave a pension to your next of kin, free of inheritance tax.
However, following changes to pensions in the Budget, one of the concerns being raised by our clients is ‘double taxation’ – essentially where a pension pot may end up being taxed twice.
The changes to IHT announced in the Budget, the tax on a pension could in the future, total as much as 89 per cent; making them more of a tax burden than the asset they once were.
Growth in gifting
Understandably, many of my clients aim to pass on as much wealth as possible to their loved ones, and when there is political change, people tend to opt for a ‘giving while living’ strategy, which they have more control over.
This includes utilising lifetime allowances, via direct gifts, or setting up trusts to manage and protect your wealth for future generations.
I have a number of clients in their 60s and 70s with family businesses who are currently looking to gift these because of the IHT changes in the Budget but are exploring the option of using a trust as the holding vehicle rather than passing the business directly to the child or children.
This approach offers more protection for the business and the child / children in case of a future marital breakdown for the latter, which can lead to financial disputes. As such, it’s becoming a more popular approach post Budget.
Get set for the Spring Statement
With many clients opting for a gifting strategy, there is currently some concern expressed by commentators that the inheritance tax seven-year rule may face changes in the Spring Statement, with some viewing the gifting rule as an “easy target” for the Chancellor. This concern is likely heightened after Rachel Reeves announced in the October Budget, that unused pension pots will be considered in the inheritance tax net from April 2027.
There’s speculation about potential IHT changes in spring: extending the seven-year survivorship rule to ten years for lifetime gifts, removing the surplus income gifts exemption, and possibly ending Deed of Variation planning benefits.
However, the Spring Statement serves primarily as commentary on economic and fiscal projections produced by the Office for Budget Responsibility.
Rachel Reeves also stated that there would be no further tax rises under the current government and so to effect these changes, the Chancellor only has two options. One; to announce the changes but only have them come into effect after Labour’s first term. Or two; argue that an extension to the seven-year rule to 10 years isn’t a tax rise, as the same rate of tax applies, but just a change to the term.
The road ahead
It’s understandable that people are concerned about further tax changes. Finance is a highly emotive topic, ultimately it dictates how we provide for our loved ones and with that comes sensitivities and stresses.
Banking tax savings under the current rules before some of the Budget changes come in or further changes are announced is good planning.
While current discussion around potential further changes could be a storm in a teacup, the concern amongst clients and advisors about the Budget changes is real. Turning to legal and financial advisors with expertise in the complexities of estate planning, will ensure you’re prepared for what the future might hold.
Duncan Bailey is head of private client at Brabners Personal