As the end of the tax year approaches, inheritance tax liabilities have surged to unprecedented levels, driven by static tax thresholds and escalating property values. HM Revenue & Customs reported a staggering £7.6 billion in IHT receipts in the first 11 months of 2024-25, surpassing the entire total of £7.5 billion for the previous year.
This surge comes at a time when financial advisors are urging individuals to leverage their gift allowances to proactively manage their inheritance tax obligations in the face of upcoming changes. Reforms announced in the latest Budget reveal that pensions will be subject to IHT starting from April 2027, impacting individuals who have diligently accumulated retirement savings under the belief that they would be transferred tax-free.
Inheritance tax applies to estates exceeding the £325,000 nil-rate band, which may increase to £500,000 if a property is involved. The tax-free allowance can reach up to £1 million for married couples and civil partners combined. With a growing number of people facing IHT liabilities, there is a renewed focus on gifting as a strategy to alleviate the tax burden.
To effectively reduce your tax liability, consider the following strategies:
- Make gifts during your lifetime to minimize the amount of tax owed.
- Capitalize on your annual gift allowance of £3,000 to reduce your tax burden.
- Couples can pool their allowances to gift up to £12,000 to recipients.
- Consider giving through surplus income, ensuring you meet the necessary criteria to qualify for IHT exemptions.
Moreover, individuals with insufficient surplus income have the option to invest in income-yielding assets and allocate the additional income towards gifting. Utilizing the appropriate investment vehicles, such as income units, can help maximize IHT exemptions and enhance the effectiveness of your gifting strategy.
For those considering extracting funds from their pensions to shield assets from impending IHT changes, it’s crucial to weigh the pros and cons. While some may choose to access their 25% tax-free lump sum earlier for spending or gifting purposes, maintaining these funds within a pension account can offer tax relief on growth and potential savings from an IHT perspective.
As you navigate the complex landscape of inheritance tax planning, remember that consistent, long-term financial planning is key to successfully managing your tax obligations. Seize the opportunity to gift strategically and proactively address your IHT liabilities, ensuring a secure financial future for yourself and your beneficiaries.
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