Inheritance Tax (IHT) planning is undergoing significant changes in the UK, making it crucial for individuals to stay informed and proactive. Recent policy shifts and upcoming reforms are set to impact how estates are taxed, emphasizing the importance of strategic planning.
Key Changes to Inheritance Tax (IHT):
- Frozen Thresholds: The IHT nil-rate band remains at £325,000, and the residence nil-rate band at £175,000, frozen until at least 2030. This freeze, amidst rising asset values, means more estates may become liable for IHT.
- Residency-Based Taxation: From April 2025, the UK will shift to a residency-based IHT system. Individuals who have been UK tax residents for 10 out of the past 20 years will be considered long-term residents, making their worldwide assets subject to UK IHT.
- Inclusion of Pensions: Starting April 2027, unused pension funds will be included in the taxable estate for IHT purposes, removing their previous exemption.
- Changes to Reliefs: From April 2026, Agricultural Property Relief (APR) and Business Property Relief (BPR) will have a combined limit of £1 million. Assets above this threshold will be subject to a 20% tax rate, impacting family-owned farms and businesses.
Strategies for Effective IHT Planning:
- Early Gifting: Utilize annual exemptions and consider gifting assets early to reduce the taxable estate. The £3,000 yearly exemption and the “gifts out of income” rule can be practical tools.
- Life Assurance Policies: Setting up life assurance policies in trust can provide funds to cover IHT liabilities, ensuring beneficiaries receive their inheritance without tax debts.
- Professional Advice: Given the complexity of the changes, consulting with tax professionals can help tailor strategies to individual circumstances, ensuring compliance and tax efficiency.
What does expert opinion say?
Experts agree that while reforms are possible, they are unlikely to happen in the immediate future. That’s why structured inheritance tax planning remains the safest way to protect your wealth. The ICAEW recently shared insights from leading professionals about upcoming trends in the sector. You can also watch this helpful video on inheritance tax planning to understand what the future may hold.
Conclusion:
The landscape of Inheritance Tax in the UK is evolving, with significant reforms on the horizon. Staying informed and engaging in proactive planning are essential steps to safeguard your estate and preserve your legacy for future generations.
For personalized advice and assistance with IHT planning, contact us at info@careaccountancy.co.uk or visit our website.
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