Potential changes
The Budget announcement will take place on 30 October 2024. Potential changes include:
- Reducing or scrapping the residence nil-rate band: Currently, there is normally no IHT to pay on the first £325,000 of your estate courtesy of the nil-rate band, plus an extra £175,000 through the residence nil-band. This means that individuals can pass on £500,000 without paying IHT, or £1million for a couple sharing their allowance.
- Limiting reliefs on inherited pensions: Changes to the way pensions attract inheritance tax could be under consideration by the Government. Currently, pension pots are free from IHT. An inherited pot is subject only to income tax at the beneficiary’s marginal rate, or in the case of the pension holder dying before 75, no tax at all when accessed in the first two years. However, there has been talk that inherited pension pots should be included in the value of estates at death for the purposes of inheritance tax.
- Changes to gifting rules: There has been some talk about changes to the 7 year gifting rule. Currently gifts given less than three years before death attract a full tax, and those given three to seven years before death are taxed on a sliding scale known as “taper relief”. There is a potential for the Government to expand this time horizon, abolish the taper relief or add a limit to IHT free gifts entirely.
- Limiting agricultural and business property reliefs: Restricting or removing the inheritance tax reliefs available to families and farmers passing on their farm businesses through the generations (agricultural property currently receives 100% relief).
Warning: Consider this before taking any action
It is important to remember that rumours don’t always materialise. Therefore, we would ordinarily advise against making decisions based on anticipated events, such as potential tax rises, because this approach involves a degree of speculation.
By acting before any official changes are confirmed, you are essentially gambling on the likelihood of a future event happening, which carries inherent risks.
Premature decisions could lead to unintended consequences, such as locking yourself into a bad decision out of fear of potential changes which might not materialise.
It is generally more prudent to wait for certainty, allowing you to make informed decisions based on actual circumstances rather than assumptions.
However, if you were planning on taking an action in future anyway (such as making a gift to a family member), it could be worth bringing forward that decision to utilise the allowances currently in place.
To consider before the Budget
Have you maximised your gifts?
If you are worried about your future estate being hit with a large IHT bill and you have spare cash, you might want to consider the gift allowances available ahead of the Budget. The £3,000 annual gift exemption allows you to give money to one or more people – for example, children and grandchildren.
Plus, if you didn’t use the exemption in the last tax year, you can also use that, meaning a couple could give £12,000 of gifts between now and the Budget – and keeping that money out of IHT’s reach.
Making further gifts
If you would like to make gifts in excess of the Annual Gift Exemption you can make cash gifts but they are subject to the seven year rule as a Potentially Exempt Transfer, i.e they will be free of IHT provided you live at least another seven years. By doing this before the Budget on 30 October you are locking yourself into the current rules, as any change to Potentially Exempt Transfers would come on 30 October onwards (not retrospectively).
Other permitted gifts that take money out of the scope of IHT include small gifts of £250 (per recipient) – and wedding or civil ceremony gifts to a child (£5,000), grandchild or great-grandchild (£2,500) and £1,000 to anyone else.
Other considerations
We have had queries about gifting property to children ahead of the Budget.
Whilst this is treated in the same way as Potentially Exempt Transfers, as discussed above (i.e exempt from IHT if the donor survives seven years from the date of the gift or tapered relief if between 3-7 years), there are some further considerations for gifting property.
To do so you must:
- Be of sound mind and not acting under pressure.
- Be listed as the owner with the HM Land Registry.
- Have no outstanding mortgage or charge secured against the property. If you have an outstanding mortgage, you can transfer equity instead.
Also, if you plan to stay in the property after it has been gifted you will need to pay rent at the same rate as similar local rental properties and pay bills. If you remain in the property rent free after ownership has been transferred, the property will not be exempt from Inheritance Tax (IHT).
Once you gift the home to your children, you are no longer the homeowner and therefore have given up any legal rights to the property, which will place you in an unprotected position if you intend on living in the property. This could mean that you are evicted should your beneficiary sells the property, a family disagreement takes place, or they go through a divorce – which are all eventualities that you should consider.
Further inheritance planning options
There are further ways you can plan ahead for inheritance tax which may form part of longer term inheritance tax planning, which we cover in our free Tax Guide (pages 17 – 20) available for you to download here.
Read more
See further details about what might be in the Budget here.
Rachael draws on over a decade of experience in tax to provide personal tax services and advice to families, company directors, and owner-managed businesses.