Inheritance tax (IHT) in the UK is on the rise, with government receipts reaching £7 billion between April 2024 and January 2025. This marks a significant £700 million increase from the same period last year and a similar jump from the previous month.
The Office for Budget Responsibility predicts IHT revenues will climb to £8.3 billion by the end of March 2025, representing a more than 10% increase compared to the £7.6 billion collected in the 2023/24 tax year.
The figure is set to rise further as from April 2027, as it is proposed that defined contribution pensions will become subject to inheritance tax.
Currently, these pensions fall outside an individual’s estate, meaning they are not taxed when passed on. However, under the proposed new rules, they will be included, potentially increasing the IHT liability for many families.
How Inheritance Tax Works
The standard inheritance tax rate is 40%, but it does not apply to everyone passing assets on when they die.
Each person is entitled to a nil rate band of £325,000, meaning they can pass on assets up to this amount free of IHT. If a person owns a home and passes it on to direct descendants, such as children or grandchildren, they may also qualify for the residence nil rate band, which is to £175,000 per person.
For married couples and civil partners leaving assets to each other after the first death, inheritance tax is typically deferred until the second partner passes away. When the first spouse dies, any unused portion of their £325,000 nil rate band and residence nil rate band can be transferred to the surviving partner, potentially allowing up to £1 million to be passed on tax-free.
What This Means for You
The proposed removal of the pension exemption is expected to bring an additional 10,500 estates into the inheritance tax net for the first time, while 38,500 estates will face higher IHT bills. If you have substantial pension savings alongside other assets like property and investments, it is important to understand how these potential changes may impact your estate planning.
For unmarried couples, the situation is more complex. Unlike married couples, they cannot transfer unused nil rate bands, nor can they pass on assets to each other tax-free. This means that if one partner leaves an estate worth £1 million to their surviving partner, inheritance tax would be due on anything over £325,000.
Planning for the Future
With these changes on the horizon, careful financial planning is essential. If you have significant pension savings and other assets, speaking to an advisor can help you determine the most tax-efficient way to manage your estate and minimise the inheritance tax burden on your loved ones.
The expert team at Ormerod Rutter can advise on a solution appropriate for you and your family. Get in touch with us today on 01905 777600 or email hello@ormerodrutter.co.uk to speak to a member of the team.
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