Pensioners are being cautioned that their UK pension is no longer protected from inheritance tax. Labour Party Chancellor Rachel Reeves' "inheritance tax raid" on unspent pension money will take effect in just under a year, bringing unused pension pots within the scope of inheritance tax. This change means what was once considered a tax on only the wealthiest "is now firmly a middle-income issue," says Rachael Griffin at investment firm Quilter.
Planning Now Essential
Nicholas Nesbitt, a partner at accountancy firm Forvis Mazars, stresses that for families, "the time for planning is now. We're seeing clients shifting their planning strategies, increasing retirement spending and accelerating gifting to cut the tax bill."
Gift Giving as a Solution
One way to navigate the new changes is through gift giving. The taxman refers to gifts as 'transfers of value'. Gifts made during your lifetime must meet specific rules to be exempt from inheritance tax. If you make a gift outside these rules, they won't be charged inheritance tax right away.
AJ Bell's Charlene Young explains: "You can make 'potentially exempt' gifts above the allowances that will usually fall out of your estate if you survive for seven years after making them. If you die within seven years of making the gift, the full value is added back into your estate. Taper relief might help reduce the inheritance tax rate payable from the usual 40%, but only on the part of the failed gift that is over your tax-free nil rate band."
Exempt Gifts
Outside the seven-year rule, some gifts are completely exempt, such as gifts between spouses. You can also gift up to £3,000 per tax year to other people without tax applying. This is known as your 'annual exemption'. If you don't use your annual exemption in a tax year, you can carry it forward to the next one. Additionally, you can give unlimited small gifts of up to £250 per person, as long as you haven't gifted part of that £3,000 allowance to the same person.
Wedding Gift Allowances
There are also wedding gift allowances for tax-free gifts to someone getting married or entering a civil partnership: up to £5,000 for your child, £2,500 to your grandchild or great-grandchild, or £1,000 to anyone else. These can be combined with other allowances. So, if you and your partner both used your gift allowance and wedding gift allowances for your child after their wedding, you could together gift them £16,000.
