The Labour government plans to introduce significant changes to UK inheritance tax regulations, marking a substantial shift in how estates will be taxed in the coming years.
These changes will affect how individuals and families plan their estates and manage the transfer of wealth between family members. This article will discuss what changes to expect, and how these changes can be handled effectively.
Overview of Inheritance Tax in the UK
Before discussing the proposed changes, it’s important to understand how inheritance tax currently works in the UK. Inheritance tax is charged on the value of someone’s net estate at death, calculated as the total value of their assets minus debts and available tax reliefs.
Currently, inheritance tax is charged at 40% on the portion of an estate that exceeds the nil-rate band threshold of ยฃ325,000.
One key aspect of the current system involves lifetime gifts, known as potentially exempt transfers. These gifts can become exempt from inheritance tax if made seven or more years before death, offering an important planning opportunity for many families.
Adjustment of Tax Thresholds
Among the most notable changes is the introduction of a ยฃ1 million cap on inheritance tax relief for business and agricultural assets, with a new reduced rate of 20% applying beyond this threshold. This represents a major shift from the previous unlimited relief system.
The standard nil-rate band of ยฃ325,000 will remain frozen until 2030, potentially bringing more estates into the tax net as asset values increase over time. Perhaps most significantly, from April 6, 2027, most unused pension funds and death benefits will fall within the scope of inheritance tax, marking a substantial change in how retirement savings are treated for inheritance purposes.
Changes to Exemptions and Reliefs
While many existing exemptions remain unchanged, including those for spouses and civil partners, the overall framework for relief is evolving. Understanding these continuing exemptions becomes even more crucial for effective estate planning.
Impact on Gift Rules
The annual gift allowance remains at ยฃ3,000, with the ability to carry forward one unused year’s allowance. Regular gifts made from income continue to be exempt, as do certain wedding gifts. However, the seven-year rule for larger gifts remains crucial – if someone dies within seven years of making a substantial gift, it may be included in inheritance tax calculations.
Implications of the Proposed Changes
These changes will have far-reaching implications for various groups. Individuals may need to reassess their pensionโs role in their estate planning ahead of 2027, while business owners must carefully consider the new ยฃ1 million cap on business relief. High-net-worth individuals, in particular, may need to revise their plans for wealth transfer.
As the ยฃ325,000 threshold has been extended up until 2030, individuals and families have a period of time to create clear plans through this time, though they must also prepare for what changes may take place after 2030.
Preparing for the Changes: Practical Steps for Individuals and Families
Given these substantial changes, several practical steps are recommended:
- Review existing wills and estate plans to ensure they remain optimal under the new rules
- Assess the impact of the pension changes on retirement planning
- Consider lifetime giving strategies while accounting for the seven-year rule
- Evaluate business and agricultural property relief claims in light of the new cap
- Consider alternative wealth preservation strategies
Most of all, individuals should ensure that their financial plans are adaptable to changing laws and policies.
How Tann Law Can Assist with Inheritance Tax Planning
At Tann Law, we understand that these changes can seem overwhelming. Our experienced team provides comprehensive support in:
- Reviewing and updating estate plans
- Structuring gifts and transfers effectively
- Maximising available reliefs and exemptions
- Planning for business succession
- Protecting family wealth for future generations
We take a personalised approach to each client’s situation, ensuring that advice is tailored to individual circumstances and goals.
Final Thoughts on the Future of UK Inheritance Tax
As these changes take effect, staying informed and proactive in estate planning becomes increasingly important. The complexity of the new rules, particularly around pensions and business relief, makes professional guidance more valuable than ever.
Whether you’re concerned about the impact of these changes on your estate or looking to optimise your inheritance tax planning, Tann Law is here to help.
Contact us to discuss how we can help you navigate these changes and protect your family’s financial future.