As it’s Valentine’s Day this week, we wanted to look at how you can leave a legacy for your loved ones in view of recent inheritance tax changes. There have also been proposals to apply inheritance tax to unused pension savings, although this is under consultation at present. We look at ways you can create a lasting legacy using financial planning methods.
What are the changes to inheritance tax?
Tax relief for businesses and agricultural assets
In the Autumn Budget 2024, the government changed tax relief for agricultural assets over £1 million (£3 million in certain circumstances). The aim was to prevent wealthy landowners from buying agricultural land for tax-avoidance purposes. It has become a contentious issue throughout the farming community, who argue this policy is a “threat to the future of family farming and the UK’s food security”.
From April 2026, inheritance tax relief is due to be capped at £1 million for businesses and agricultural assets. This reform affects agricultural property relief (APR) and business property relief (BPR), where there is currently no cap.
Above £1 million, the inheritance tax liable will be at a reduced rate of 20% instead of the standard 40%. Therefore, if you own a business or farm worth more than £1 million, your family will be paying IHT at 20%.
Tax on unused pension savings
Another change currently being proposed is to include unused pension savings within the estate for inheritance tax (IHT) purposes. At the moment, pensions are paid tax-free to the beneficiaries of someone’s estate. It’s important to note that pensions have been designed to fund your retirement, which is why the government is considering taxing unused savings.
From April 2027, unused pension savings may be liable for 40% inheritance tax if the estate value exceeds tax-free thresholds. For most people, this will apply when estates exceed £325,000. When a home is left to children or grandchildren, the threshold increases to £500,000. There is no IHT to pay when an estate is left to a spouse or civil partner.
It’s worth noting that the majority of estates fall below the thresholds and don’t pay IHT. Therefore, it’s essential that you get an accurate valuation of your estate.
How can we limit the impact of inheritance tax?
Once you have your estate value, you can look at ways to mitigate your family’s future inheritance tax (IHT) obligations.
Below are some recommendations:
- Make a will – this sets out how you want your estate to be distributed according to your wishes. A valid will gives estate planners a framework to make legal tax-efficient recommendations.
- Leave estate to your spouse or civil partner – this is the most obvious method, as long as there is a surviving partner. They would also inherit your unused nil-band rate, which doubles their IHT threshold. However, when the surviving partner dies, this can lead to a large IHT bill for adult children or grandchildren.
- Transfer certain assets into trusts – this is one method that can help to reduce the IHT bill. As the trust is managed by a group of trustees, it would not be included within your estate. However, the 7-year-rule may apply, which means if you were to die within 7 years of setting up the trust, then it would not be included in your estate. Setting up a trust can be very complicated and there can be certain implications, so always speak to a professional financial planner before proceeding.
- Gifting to family – you could look at reducing the estate value through gifting. The gift allowance is £3,000 for children and grandchildren, which can be carried over to the following year. You can give £250 to someone as many times as you like, which is known as the ‘small gift allowance’. This applies as long as another allowance hasn’t been used on this same person. However, the 7-year-rule applies to gifts, so if you were to die within 7 years, any gifts would be considered in your estate value.
- Gifting to a charity – if you leave 10% of your net estate value to a charity, the IHT rate reduces to 36%. The ‘net’ amount is what remains after all debts and expenses have been paid, such as funeral costs. In some cases, your beneficiary might be able to top up this amount to meet the 10% if the gift amount falls short.
Wealth planning, Nottingham and Lincoln
If you or your family have been affected by the recent inheritance tax (IHT) changes, then it’s worth carrying out an estate planning exercise. There may be ways to safeguard your family’s legacy without them having to face a large inheritance tax bill.
At Balance: Wealth Planning, our financial planners will carry out a full review of your estate, advising you of potential inheritance tax liabilities. We can help you to arrange wills and trusts so you can protect your legacy for your loved ones and future generations.
Are you concerned about the impact of inheritance tax on your legacy and your loved ones? For advice, get in touch to speak to our financial planning team.
Sources:
https://lordslibrary.parliament.uk/budget-2024-inheritance-tax-and-family-farms/
https://www.wesleyan.co.uk/financial-advice/avoiding-inheritance-tax
