Let’s have a chat about inheritance tax, shall we? Especially if you’re a diligent saver and investor, working hard to build up a nest egg to support your family’s future. The taxman might have other ideas about that!
What are the inheritance tax thresholds?
Here’s a quick rundown on inheritance tax (IHT). When you pass on, everything you own – property, cash, the odd treasured painting – is valued and transferred according to your will. If your estate goes to your spouse, no IHT applies. But if it’s left to anyone else, the first £325K is tax-free, while anything above that gets hit with a 40% tax.
Some good news: if you leave your main home to a ‘direct descendant’ (think children or grandchildren), you get an extra £175K added to your tax-free threshold. That brings your total allowance to £500K. Plus, if you’ve inherited your spouse’s IHT-free allowance, you might be able to leave up to £1 million tax-free.
So, what’s new from the budget?
Starting April 2027, pension funds will be considered part of your estate for IHT. Previously, pensions were exempt – a safe way to pass on wealth to your children tax-free. Sadly, those days are over.
And the threshold? It’s frozen at £325K until 2030, even as property prices keep climbing. This threshold hasn’t budged since 2009, so, effectively, the IHT-free allowance has shrunk when you factor in inflation.
How to avoid inheritance tax?
I like to say that inheritance tax is a ‘voluntary’ tax – with enough planning, you can often sidestep it. If you think your estate might exceed the IHT threshold, here are some ideas:
- Gift early. Anything you don’t need after retirement? Gift it away! Cash gifts are classified as ‘potentially exempt transfers’ (PETs). If you survive 7 years after giving them, they’re tax-free. If you don’t make it to 7 years, the tax gradually reduces after 3 years, reaching zero at 7.
- Property transfers are a bit trickier and may trigger capital gains tax, so if this is on your radar, speak to an advisor.
Could we see a return to cash under mattresses to dodge IHT? Stranger things have happened!
Remember, everyone’s situation is different, so for tailored advice, it’s wise to chat with a tax expert. Don’t leave your estate to chance!
