The new rules are coming in soon
Families have been advised to check whether a hefty HMRC bill could be coming their way. Financial advisers have cautioned that some people will face a significant rise in their tax obligations as new regulations take effect.
Labour set out plans in its first Autumn Budget in 2024 that it would broaden the scope of inheritance tax. This 40 per cent levy applies to the total value of assets you inherit, above certain thresholds. One traditional way of avoiding the tax has been to transfer your wealth through private pensions.
These are currently excluded from your estate for inheritance tax purposes. However, from April 2027 the tax will be extended to cover unused pensions. Wealth management firm Saltus reports that many clients have expressed worries about the new levy.
Alex Pugh, chartered financial planner with the firm, said: “We are having this conversation with every client that could be affected, so 100 percent of clients. No one has said they’re unconcerned about it.
“Everyone wants to understand the potential implications for their estate.” Ms Pugh explained that making pensions subject to inheritance tax could lead to a hefty bill for some families.
‘Significant’ tax rise
She said: “In many cases, clients’ largest assets are their property and pension, so bringing pensions into the inheritance tax net can significantly increase potential liabilities. However, while clients are interested in exploring their options, in practice there can be limits to what can be done.
“Many still need these assets to fund their retirement, so they’re understandably cautious about making drastic changes purely to mitigate tax.” She said that a primary concern for their clients is how the regulations will specifically affect them.
Ms Pugh said that further clarity is required from the Government regarding precisely how the tax will be calculated and collected. She explained: “It has been indicated that personal representatives of an estate will be responsible for calculating the inheritance tax liability and informing pension providers of the amount due.
“However, the exact processes and administrative steps involved are still evolving, and more detail will be needed so executors and advisers know exactly how this will work.”
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Planning can be complex
She was also asked how the inheritance tax system could be improved. The tax specialist said: “One of the biggest improvements would be greater simplification.
“The system currently contains many layers and nuances, from gifting rules to different allowances and tapers, which can make planning complex.” Every individual receives an allowance enabling them to pass on up to £325,000 in total assets tax-free, plus a £175,000 allowance if transferring their main residence to a direct descendant.
Any unused allowances can be transferred to your spouse or civil partner, potentially allowing them to pass on up to £1million in assets tax-free when they die. A recent piece of research by Saltus revealed that inheritance tax is viewed as one of the most unreasonably high taxes in Britain.
