Martin Lewis has shared essential need-to-knows about Inheritance Tax ahead of the Autumn Budget on October 30. Speculation is mounting that Chancellor Rachel Reeves may make changes to the Inheritance Tax treatment on workplace and private pensions.
Inheritance Tax is a tax on the estate – property, money and possessions – of someone who has died. There’s normally no Inheritance Tax to pay if either the value of the estate is below the £325,000 threshold or the deceased person has left everything above that threshold to their spouse, civil partner, a charity or a community amateur sports club.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, explains that as it currently stands, in most cases, a pension is treated as being outside of a person’s estate for Inheritance Tax purposes.
This sets it apart from ISAs and can lead to people running down other savings in retirement before touching their pension, which can then be passed on to loved ones.
However, addressing Budget speculation, Ms Morrissey said: “Making pensions subject to Inheritance Tax could potentially raise a decent chunk of money for the UK Government and incentivise people to spend their pot during their lifetime. We could see people opting to give away more gifts in their lifetime to family as a means of mitigating this tax, which could play a huge role in helping younger people get onto the property ladder.”
Inheritance Tax guidance on GOV.UK states: “If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000.
“If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.”
To help people understand the complicated rules of Inheritance Tax before any possible changes are made on October 30, Martin Lewis has compiled a simplified guide on MoneySavingExpert (MSE.com) to help people understand the process, and who it might affect.
- Martin explained that the “vast majority shouldn’t worry about Inheritance Tax” as only “one in25 estates pay it”. He continued: “Only those at the higher end of the wealth scale are impacted by current rules, as only about 4 per cent of estates pay it (though many more fear it).”
- Anything left to a spouse (married / civil partner) is exempt from Inheritance Tax. Martin explained: “You can leave whatever you want to them and there’s no tax on it”. However, he warned that this doesn’t apply to those who are just cohabiting – no matter how long they have been together.
- If your estate is under £325,000, no Inheritance Tax is paid. Martin added: “You don’t pay Inheritance Tax on the first £325,000 of your estate. So if that’s you, IHT is not an issue.”
- Martin added that the £325,000 is “boosted by £175,000 to £500,000 if you pass on your main residence to your direct descendants”. He added that this includes biological, foster, step or adopted children or grandchildren.
- Martin explained that you can pass all your unused allowance to your spouse. He said: “If you left them everything, they could leave £1million (including a house) with no Inheritance Tax. As that’s your £500,000 and their £500,000.”
- This is the big one, Martin said that if it looks as if your estate will be over your total allowance, Inheritance Tax is charged at 40 per cent of everything above that. He explained: “If your estate is £1.3m including the house, and it is all passed to one spouse, then on to dependants, you’d pay 40 per cent of the £300,000 above that, ie, £120,000.”
- Martin said that if it looks likely that you will pay Inheritance Tax, “giving assets/money away while alive can cut/cancel it”. He continued: “Anything you can comfortably afford to give out of your normal income is exempt from Inheritance Tax.” He added that there are a “whole host of allowance” even if giving away from your capital adding, “the longer you live after giving it away, the better”
For full details on the gifting rules visit the MSE.Com website here.
You can also listen to the Inheritance Tax special on the Martin Lewis Podcast on BBC Sounds here.
A full guide to Inheritance Tax can also be found on the GOV.UK website here.