Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “Inheritance tax may not be an issue for the vast majority of people, but if you do find yourself in the net, then your family could face a nasty surprise bill after you’ve gone. From April 2027, unused defined contribution pensions will be counted as part of your estate for inheritance tax purposes. It’s a move that 9% of people believe may tip the size of their estate into tax paying territory. A further 6% believe it could make their current liability worse.
However, the level of awareness is low. Almost one-third of people have no idea how this change might affect them and their family. Wealthier people are more likely to have an idea – only 3% of additional rate taxpayers didn’t know. This compares to 23% of higher rate taxpayers and 35% of those paying tax at basic rate. This is understandable as the more you earn, the more assets you are likely to have. But if you own your own home, and have a decent pension, then it’s something you need to be aware of so you can prepare, and perhaps, more importantly, make your family aware of any potential bill they may have to deal with.
Inheritance tax can become an issue if your estate is worth more than £325,000. Added to this, if you are looking to pass down the family home to a child or grandchild, you have a residential nil rate band worth £175,000 that you can use. Married couples and civil partners have extra flexibilities in that assets of any value can be passed between them without being subject to inheritance tax. They can also inherit unused portions of each other’s nil rate bands. This means that a widow/er can potentially pass on an estate worth up to £1m before worrying about inheritance tax.
However, it’s important to add that these flexibilities do not apply to cohabiting couples. You can live together for decades but, when one partner dies, there’s potential for a nasty surprise bill at an already difficult time. Worryingly, almost 40% of cohabitees remain in the dark about how these changes might impact them.
It’s important to think about how the change might affect you and your family - if you think there could be a liability you can put a plan in place. Any inheritance tax needs to be paid by the end of the sixth month after the person dies. After this interest can be charged. Good communication between all parties is important so people know a bill may need to be paid and by what means.
You may also wish to reduce your liability by starting to gift away assets while you are still alive. This gives you the opportunity to help your loved ones sooner. It also means you can see how they deal with the extra cash and this might determine whether you give them anything else in future. However, you need to take a long-term view as you don’t want to risk giving away too much too soon and leave yourself struggling in later life.
Gifts of any value can be given and will pass out of your estate after seven years - these are known as potentially exempt transfers. There are also various other allowances that mean the money falls out of your estate for inheritance tax immediately. These include the £3,000 annual exemption. There’s also gifting out of surplus income rules, that enable gifts of any size to be made and leave your estate for inheritance tax purposes immediately. To qualify they need to be made from income, not capital, be made regularly, and not impact your standard of living. It’s important that you document your gifting behaviour and working with an adviser can help you stay the right side of the rules.”
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