It will be another record year for inheritance tax (IHT) payments.
IHT receipts for April and May reached £1.5bn, nearly £100m higher than the same period last year. Total IHT revenues have increased by more than 50 per cent over the past five years and are predicted to raise £9.1bn in the 2025-26 tax year.
This is before any further ‘tinkering’ to the current rules by the chancellor in the Autumn Budget. As part of last year’s fiscal statement, the government announced that most unused pension funds and death benefits would be included in the value of a person’s estate for IHT from April 2027.
These significant policy changes – as well as restrictions on agricultural and business reliefs – will increase receipts even higher. In addition, the nil-rate band, which has been frozen at £325,000 since 2008, will be extended to the 2029-30 tax year. In 2008, the average house price in the UK was around £155,000 and in London, around £270,000. Now the average house price in the UK is £307,000, and £529,000 in the capital.
It is easy to see why inheritance tax is such an important topic to discuss with your family, and your professional advisers. Often your financial planner will work with your accountant to consider the most appropriate methods for mitigating inheritance tax, if desired.
This may include setting up trusts and making use of gift allowances and the spousal exemption. Gifting can be a simple and effective tool to reduce estates, but advice should be sought before restricting access to, or giving away funds that may be required in the future.
Individuals can gift funds to loved ones to reduce the size of their estate but must survive for another seven years to avoid inheritance tax being due – this is known as the seven-year-rule. If the person dies within seven years, the gift will be included in the estate and inheritance tax may be charged on the sum. It is also possible to make regular gifts from ‘excess income’.
It is important to keep accurate records of any gifts in the year when the gift happens – trying to establish the correct information at the time of enquiry (and in the haze of emotional upheaval) is unlikely to be reliable.
Having worked hard to accrue assets, most clients we meet wish to ensure these can be passed to the next generation and beyond. Now that unused pensions will generate IHT payments, a different strategy could be needed to do just that.
While retirees often choose to use assets such as ISAs to fund later life and retain their pensions, this approach is likely to shift in the next few years.
Should you have any concerns, your adviser will be happy to discuss generational wealth planning with you at your next review meeting.
Inheritance Tax/Estate planning is not regulated by the Financial Conduct Authority.
