As inheritance tax (IHT) is set to extend from 2026, what are your options to mitigate its impact?
Three quick questions on IHT, in ascending difficulty:
- How much is the current nil rate band (NRB)?
- When is the NRB next due to increase?
- Which Chancellor originally set the current NRB level?
The answers are:
- £325,000
- 6 April 2030, as announced by Rachel Reeves in the October 2024 Budget.
- Gordon Brown (in 2006, effective from April 2009).
Given the scale of the problem, the Commission is expected to recommend an increase to minimum contribution levels, as well as proposing an auto-enrolment style system for the self-employed who currently lag behind.
Rachel Reeves has also increased future IHT receipts by reducing business and agricultural reliefs from next April and bringing most pension death benefits into IHT from April 2027.
Recent media reports have suggested that the upcoming Autumn Budget could see a further tightening of the IHT regime, focused on lifetime gifting.
Gifting
If you are concerned about the potential impact of IHT on your family, then consider making lifetime gifts before the Budget. The current rules are generous – any outright gift attracts no immediate IHT and is free of that tax if you survive the following seven years. Even if you only survive just over three years, in some circumstances you could still save IHT.
The major problem with outright lifetime gifts is that you need to be willing and able to make them, for example on downsizing the family home. However, often there are taxes or other considerations (e.g. care costs) that limit their scope. Fortunately, large lifetime gifts are not the only way to help mitigate IHT.
Start by reviewing your will, which determines how your estate is divided up. If you do not have a will, then the distribution of your estate defaults to intestacy rules, which can create unnecessary IHT liabilities. If you do have a will, make sure it’s up to date – changes to IHT law over the years have rendered some old wills less effective than when they were written.
With your will in place, you can then examine your lifetime planning options. Various exemptions exist for regular gifts. Some investments can be chosen or structured to reduce your IHT liability while retaining the right to receive an income for your benefit.
The ultimate backstop – a whole of life assurance policy placed under trust – has seen a renaissance in popularity since last year’s Budget. The policy premiums will often be covered by regular gift exemptions, while the trust framework ensures the policy’s value is outside your estate and immediately available to your chosen trustees.
Whatever your IHT knowledge or plans, advice is vital. The nil rate band may not have changed for 16 years, but over that period the surrounding legislation has greatly expanded in complexity.
For more information
Contact the teamRisk Warnings
The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.
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