There’s a hidden horror in our pensions that could have a big impact on our families – but less than half of us are aware of it.
Only 48% of people know that the government plans to make pensions subject to inheritance tax from 2027. It’s a tax that is currently only paid by around 4% of families, but the inclusion of pensions will open it up to a lot more, and potentially leave them facing a nasty surprise bill.
When we drill down into the numbers, we see that 86% of additional rate taxpayers are aware of the incoming change. This is a group that is far more likely to have a looming liability so it’s good that awareness is so high.
This compares to 58% of higher rate taxpayers and 45% of people paying tax at basic rate. Additional rate taxpayers are likely to have other assets and pensions that could push them into inheritance tax-paying territory.
It’s also worth saying that the huge property price increases that we’ve seen in recent years could push many more families closer to the brink and, with the addition of pensions to the mix, could tip them over into paying IHT that they wouldn’t have paid previously.
However, it’s important to realise that there’s things you can do to mitigate an IHT bill – understanding the rules is vital:
Inheritance tax is only payable on estates worth more than £325,000.
Added to this is the residential nil rate band which kicks in if you are looking to pass on your home to children or grandchildren and this is worth £175,000.
If you are married or in a civil partnership you can pass assets of any value to your partner, and they will not be subject to inheritance tax. This is a key reason such a small percentage of estates have a liability.
In addition, you can also inherit any unused portion of your spouse/civil partner’s nil rate bands. This means you may be able to pass on as much as £1m to loved ones free of inheritance tax.
There is also a set of rules around gifting that can help you manage an inheritance tax bill. Gifts of any value leave your estate for inheritance tax purposes after seven years.
However, there are also further allowances that mean you can give money away and it leaves your estate immediately. These include the £3,000 annual allowance, gifts to loved ones getting married and the £250 small gift allowance.
There’s also ‘gifting out of surplus income’ rules that enable you to give away gifts of any amount and they leave your estate immediately. You need to be able to prove the gifts are regular, you aren’t impacting your own standard of living, and you are gifting from income rather than capital.
This can be a useful way of managing a potential inheritance tax bill, but you will need to make careful notes as to what was given and when, so a pattern of gifting is established. You may decide to take financial advice to make sure you aren’t falling foul of the rules.
It’s important to be aware of these looming changes, but not let worry push you into making action that you later come to regret.
With this in mind, it’s really important that you don’t give so much away that you potentially leave yourself short of cash later on in life, when you still might need it. Any gifting plan should give yourself room to manoeuvre should you find yourself needing care later in life for instance. You don’t want to be in a position where you need to ask loved ones to return money at a later date.