Chancellor Rachel Reeves is reportedly planning to launch an inheritance tax raid on Budget savers, potentially changing key thresholds or other exemptions.
Inheritance tax is currently charged at 40 per cent on assets above the main threshold of £325,000 when people die.
But there is an additional allowance of £175,000 if your main home forms part of your estate and you leave it to your direct descendants; therefore, couples can transfer up to £1 million.
One option the Chancellor has is to merge the two thresholds, known in financial jargon as the nil rate band and the residency nil rate band, but cutting the total amount that can be left to loved ones free of inheritance tax.
Inheritance tax: only 4 percent of the richest families pay it, but more and more are being dragged into its network
Another persistent rumor is that the Chancellor could include pensions in the assets counted in inheritance tax.
Currently, those who inherit pensions pay no tax if the holder dies before age 75, or their normal income tax rate (with the money they receive added to their earnings to calculate it) if they are 75 or older.
There are also a number of reliefs that cover gifts, encourage people to invest in new businesses and protect family farms, all of which could be amended to get more inheritance taxes, often called the “most hated” of all. taxes of this country.
> Read more: How does the inheritance tax work? and 10 ways to avoid inheritance tax legally
Only the wealthiest 4 percent of families pay the inheritance tax, and there are many ways to plan ahead and help your loved ones avoid the tax.
However, the property boom of recent decades and frozen thresholds are dragging many more bereaved families into the inheritance tax net and the Treasury has been collecting ever-increasing sums as a result.
Meanwhile, changing some reliefs could have detrimental knock-on effects, running counter to the Government’s goal of promoting economic growth.
Business ownership relief offers inheritance tax exemptions to those who invest for at least two years in some of the most adventurous and therefore riskiest companies, so a crackdown could affect real companies and the market AIM.
Currently, properties are also allowed to be passed on free of inheritance tax if they qualify for agricultural relief, which the Government describes as “land or pasture used for intensive cultivation or animal husbandry”.
Wealthy people often invest in agricultural land to reduce their inheritance tax bill as a result of this relief, which is intended to protect farmers. However, any incursion into this area would also have consequences for farming families.
Sarah Coles, head of personal finance at Hargreaves Lansdown, says reports that inheritance tax exemptions are in the Chancellor’s sights will strike fear into the hearts of one in 10 pensioners, who say this is the budget measure what they fear most.
‘No wonder. The fact that so few estates pay inheritance tax is largely due to these exemptions, so if the Government were to modify some of the big losers it would be devastating for millions of families.’
It adds: ‘Figures show £15.5 billion was transferred tax-free to spouses and civil partners during 2020/21, making it the largest inheritance tax exemption on record.
‘If this were to change, instead of the surviving partner being able to gift up to £1m inheritance tax free, it could be limited to £500,000.
“The hope is that because this is such an essential exemption, the Government will be wary of making a change that would cause potential hardship for so many people and could lead to people being forced to sell their home to pay a utility bill. inheritance tax.”
Hargreaves adds that treating pensions similarly to other savings and investments for inheritance tax purposes would be a blow to anyone planning to pass their funds on to other family members, but would encourage people to spend the money or make more donations while they are still alive.
Rachael Griffin, tax and financial planning expert at Quilter, says most of the £7bn annual income from inheritance tax comes from well-off people, largely because they have worked hard, saved and invested diligently. .
‘If Labour’s reforms are perceived as a tax rush, they are likely to receive a significant backlash. The authorities should seriously approach inheritance reform instead of using it as a political and income-generating tool.
“For some time, the Labor Party has considered reforming or even closing various tax reliefs, such as agricultural and business property reliefs, with a view to potentially removing, limiting or redefining these benefits, which could have the domino effect AIM shares lose their inheritance tax exemption.
“A move that would seem strange for a government seeking to boost growth and investment in UK assets.”
But he adds: ‘If the reports are true and Labor chooses to make IHT more punitive, it could choose to balance this by modernizing donation laws.
“Simplifying the inheritance regime and increasing the annual gift exemption could alleviate the complexity of asset transfers and help families pass on their wealth during their lifetime.”
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