Taxpayers have a “secret weapon” in their arsenal, that can help them move a large chunk of their estate out of the clutches of Chancellor Rishi Sunak and the Treasury. Yet many fail to exercise this option, even though it is available to everyone.
In his Budget last March, the Chancellor froze the inheritance tax (IHT) threshold at £325,000 for five years. It will stay at that level, until at least 2026.
It has already been frozen since 2009, steadily increasing HM Revenue & Customs’ revenues as house and share prices rise.
Sunak also froze the nil-rate main residence IHT threshold at £175,000 last year, which will drag more family homes into the HMRC net.
Today’s figures show this is already having an impact, with IHT receipts jumping by £700 million in the year to March 2022, to hit £6.1 billion in total.
The Office for Budget Responsibility recently forecast that the Treasury will receive a staggering £37 billion in IHT payments over the next five years.
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Julia Rosenbloom, tax partner at Tilney Smith & Williamson, said the Treasury “needs every pound it can get at the moment” to meet its spending plans.
Families should take action and look carefully at their tax planning and consider advice to reduce the impact on their estate.
She said: “Families have an opportunity to reduce or eliminate their IHT bill through investing tax-efficiently and making gifts to family members.”
Steven Cameron, pensions director at Aegon, said families have a secret weapon at their disposal, in the shape of their pension.
“Currently, funds held within most pensions fall outside of an individual’s estate for IHT purposes, whereas many other investments, including Isas, can be subject to IHT on death.”
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IHT planning is complex, but making full use of your pension should be high on your list of ways to reduce your exposure, Cameron said. “There are many considerations around how best to save and invest, but if IHT is a worry, pensions offer a preferential approach.”
In retirement, many people prefer to spend other forms of savings first, such as cash or Isas, which may be liable to inheritance. They keep their pension in reserve as this can be passed on to loved ones IHT-free on death if they don’t need it.
Inherited pension can be passed on entirely free of tax if the policyholder dies before age 75, although if they die afterwards, the recipients may have to pay income tax on it at their marginal rate. Pension rules are complicated, though.
There are constant rumors that Sunak will scrap this hugely valuable pension IHT benefit, so that retirement savings do become subject to inheritance tax on death.
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Cameron said any such move would be unfair. “When saving in a pension, the vast majority of people are doing so to provide an income for themselves, and a partner, in retirement, rather than passing on an inheritance.
“Bringing accumulated pension funds or ‘death benefits’ into an individual’s taxable estate on death would seem particularly harsh and unjustified.”
Cameron said the Government wants to encourage more people to save more into pensions, and creating a possible IHT liability “would be highly counterproductive”.
As rules stand, investing in a pension is a sensible way of avoiding Sunak’s inheritance tax grab, although people should consider other options such as gifting.
Cameron added: “This is a complex area and we recommend seeking professional financial advice.”