Rumours are swirling that inheritance tax (IHT) will be tweaked in the Autumn Budget this October.
Given that fewer than one in 20 estates pay it, uncertainty about any potential change is creating a disproportionate amount of anxiety.
Here’s a closer look at what the government could think about changing and what you can do about it.
This article isn’t personal advice. Inheritance tax can be complicated, if you’re not sure of a course of action, you should ask for financial advice. We can advise you on how to make use of tax allowances, but if you need complex tax calculations, we recommend consulting an accountant or tax specialist.
Tax rules can change, and any benefits depend on personal circumstances. Investments fall as well as rise in value, so you could get back less than you invest.
Revisiting nil rate bands
Nil rate bands play a big part in protecting smaller estates.
The first £325,000 of your estate (your property, money and possessions) fall into the nil rate band, so you don’t pay IHT on it.
If your assets include the family home that you’re giving away to children or grandchildren, you also get a £175,000 residence nil rate band. That means you can give away this property up to this value and pay no IHT on that either.
We can’t rule out any changes to these bands, but it would be incredibly controversial, which could make the government think twice.
Reconsidering rules around spouses and married partners
Anything you leave to your spouse or civil partner is free of inheritance tax, and if you pass everything to them, you also pass your nil rate bands.
It means when the second person in a married couple dies, they can leave assets worth up to £1 million free of tax.
Changing these rules would risk a backlash, not least because paying tax on assets left to a spouse could mean bereaved spouses get forced out of their home by HMRC. This might push it down the list of options.
Tweaking agricultural relief or business property relief
There are specific types of relief available to farmers and owners of family businesses, and investors in the alternative investment market (AIM).
The government might consider change here, because it could tweak the rules to make them less generous rather than axing them altogether.
However, it would need to consider the implications of change very carefully, not least on AIM investments.
AIM shares will normally qualify for business relief, which means they can be passed down without having to worry about paying inheritance tax (IHT) on them.
However, this is provided they’re held for a minimum of two years, they’re still held at death, and the shares still qualify when the holder passes away.
If the shares haven’t been held for two years, a surviving spouse or civil partner can inherit the portfolio without restarting the holding period.
Investors need an incentive to invest in smaller companies, where they’re exposed to more risk. The government would need to weigh up the implications for these companies if they were to cut the tax benefits of holding AIM stocks.
Making pensions subject to inheritance tax
Money in a defined contribution pension can be passed on without having to pay IHT – this could be an area that the government look at.
If you have a defined benefit pension, plan to buy an annuity, or to spend all your pension, there’s no change.
The number of people falling into these categories could limit any potential backlash.
However, it would be a nasty blow for anyone hoping to use their pension to help cut their IHT bill.
Charging capital gains tax on death
If you pass on investments outside an ISA or pension after you die, there’s no capital gains tax (CGT) to pay – so it effectively resets to zero.
The government could consider this relatively low-hanging fruit. If you’re sitting on gains, this could raise concerns.
What can you do?
Use your CGT allowance
If you’re worried about CGT, and you have stock market investments, it’s worth considering realising gains gradually over time. You can use your annual £3,000 CGT allowance so you pay no CGT on them.
Think about Share Exchange (Bed & ISA)
You can also think about gradually moving these investments into Stocks and Shares ISAs using the Share Exchange (Bed & ISA) process each year, Whilst you could incur CGT when selling your investments, it would mean no further CGT to worry about in future.
If you have shares in an HL Fund and Share account, you can use the Share Exchange (Bed & ISA) process to sell them outside an ISA, move the cash into the ISA wrapper and buy back the same shares again, all in one instruction. You have to stick to your overall £20,000 ISA allowance though.
But when your investments are in an ISA, you won’t have to worry about UK dividend tax or CGT.
Also, don’t forget about your £3,000 CGT allowance when you’re selling investments to move into an ISA.
Gifting to save IHT
If you’re worried the government might cut the nil rate band, you can give away up to £3,000 within your annual gift allowance. A couple could combine their exemptions.
You can also give away more as Potentially Exempt Transfers (PETs).
There’s currently no limit to how much you can gift as a PET, however the value of the gift would only be exempt from IHT if you survive for seven years after it’s made.
If you pass away within this seven-year period, the gift becomes chargeable and would then increase the overall tax bill. Your executors can claim taper relief, which reduces the tax payable on the excess you’ve gifted over your available nil rate band.
This relief is available between three and seven years after the gift is made. The longer the period between the transfer and your passing, the greater the taper relief and therefore the lower the tax.
This is how the rules stand right now, but of course there’s no ruling out that the government won’t change these either.
If you have children in your life who are under 18, you could pay into a Junior ISA for them.
This is counted as being given away for IHT purposes. But it will be tied up until they reach 18 and are ready to make sensible decisions about their nest egg.
These options make sense if you were planning to give this money away anyway, and you can afford to part with it. However, it’s vital not to let tax anxiety force you into something that’s not right for you.
Pay no account charges or online dealing commission. Other charges depend on investments chosen.
Invest with the best value Junior Stocks and Shares ISA
Manage all your family’s accounts with one login
UK-based helpdesk with under a one minute average answer time
Start from just £100 lump sum or £25 a month
Invest for your child’s future with our award-winning Junior ISA.
Could our advisers help you with IHT planning?
Our financial advisers are experts at helping clients organise their estates to keep more money for loved ones and less for taxes. They stay up to date with the latest rules as they’re announced so you can navigate complex regulations with confidence.
A call with our advisory team is the first important step towards getting IHT advice. It will help you:
Discover if advice is right for you
Understand the benefits and cost
Decide which of our advisory services might suit you best
You won't get personal advice on the call and there’s no pressure to take advice. Only if it’s right for you, will we book your free initial consultation with one of our Financial Advisers.