Inheritance tax warning as countdown begins to major rule change – ‘make most of this’ | Personal Finance | Finance

Retirees who want to maximize the amount they will leave to their loved ones after death have been given some important instructions. Helen Morrissey, head of pensions analysis at Hargreaves Lansdown, says that from Monday this week, “time is running out” for unused defined contribution pensions, such as workplace pensions, to become part of estates for Inheritance Tax (IHT) purposes.

Starting April 6, 2027, most unused retirement funds and death benefits will be added to the value of the estate. Pensions are generally currently located outside of estates and are therefore not included in inheritance tax calculations after you pass away. After April 6, they will be added to a pot that will be taxed at 40% above the £325,000 tax-free threshold, known as the nil rate band. He explained that there is a so-called ‘residential nil rate band’ worth up to £175,000, which allows a single parent to bequeath the family home to a child or grandchild, and another that allows him to pass on property worth £500,000 outside of inheritance. Remember, these benefits diminish when you transfer a very large property.

People who are married or in a civil partnership have other options, such as the right to transfer assets of any value to their partners free of inheritance tax.

These beneficiaries may also inherit unused nil-rate bands owned by the deceased; This means that a surviving spouse/civil partner can potentially transfer as much as £1 million on death before their estate becomes subject to inheritance tax.

But some taxpayers will have to take into account how pensions could expand their taxable estate and subject them to taxes they are not currently subject to.

Ms Morrissey said the pension rule change, which comes into force next year, “has attracted a lot of attention, but it’s important not to panic; the number of estates liable for inheritance tax has increased and will continue to increase, but they will be in the minority, so check to see if this might be an issue for your family.”

“If there is potential liability, there are steps you can take to reduce its impact, but it will require careful planning.”

One way to reduce your taxable assets is to donate your assets while you are alive, and there are clear benefits to doing this seven years in advance. “There are various allowances you can use to reduce the value of your property,” Ms. Morrissey explained. “You can gift any amount of money to a loved one and this money will be deducted from your inheritance for inheritance tax purposes after seven years.

“These are known as Potentially Exempt Transfers (PET). If you die within this period, inheritance tax may be payable, although possibly at a reduced rate.”

There are also allowances you can use to transfer money out of your estate immediately, such as using your £3k annual allowance to gift money to loved ones.

Tax laws also allow gifts of up to £250 to be given to any number of recipients; but this cannot be given to someone who receives a separate gift through another grant.

Doing this “will mean that part of the gift will be classed as a PET and you will have to live seven years after giving for the gift to become IHT-free,” the expert says.

Allowances are also available for those who want to gift funds to loved ones who are about to get married (up to £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to another person regardless of their relationship to you).

But Ms. Morrissey says such gifts should be made either during or before the wedding, and that the weddings must actually take place.

You can also leave gifts to charities and political parties, making them exempt from inheritance tax. If you donate at least 10% of your net worth to a UK registered charity when you die, you will find that the rate of IHT you pay on your remaining estate will also be reduced.

Another important rule he points out is what tax experts call “forgiveness of excess income.”

This process allows you to donate any amount you wish, with the funds immediately leaving your estate for IHT purposes.

“But there are rules,” he warned. “The gift needs to come from income, not capital. It needs to be made regularly and shouldn’t affect your standard of living. Examples of this might include paying school fees for a grandchild or contributing to a Junior ISA.”

Ms Morrissey says that although gift-giving is an effective strategy, it is important to keep careful notes of what was given to whom and when, so loved ones have evidence they can present if necessary.

He also recommends doing this with the help of a financial advisor to ensure no rules are accidentally broken.

You also need to be aware of how the status of gifts can change depending on how they are used. “So, for example, if you gifted your house to a relative and continued to live there without paying rent, this can be seen as a gift with reservation, that is, if you are still using it. In such a case, your property may be seized with a promissory note.”

Trusts can also form part of your inheritance tax strategy, but due to their complexity you may still face a gift tax bill, so it’s important to consult a professional who can explain your options.

He issued a warning for cohabiting couples as, unlike married couples, they will not be able to inherit any amount of assets or benefit from their partner’s nil rate bands.

“This can present a nasty shock at an already difficult time, so as well as planning ahead, it is worth making sure important documents such as wills and wish forms for retirement are updated and maintained,” he said.

While dependents will likely be a primary consideration for people making plans for after death, Ms. Morrissey stressed the importance of not giving away too much too soon. Doing this could leave you incapacitated later in life and you may need to save money for your care, which isn’t exactly cheap.