A great many anxious enquiries from clients have been generated by the Budget announcement that pensions would become subject to Inheritance Tax from 2027.
Join us for a brief toe-dip into the murky IHT waters and consider what options you may have – but please take advice first!
Independent Financial Advisers (IFAs) have been fielding numerous calls and emails from concerned customers who fear this has thrown their estate planning into disarray, with many interested in finding out how they can use existing gifting rules to pass more on to their children.
In the Autumn Budget, the Chancellor announced IHT would be imposed on pension assets passed on after death from April 2027 – it is important to note this applies to children or other beneficiaries and not the surviving spouse.
It is also very important to note this is still a proposal and indeed in December we invited you to have your say in a consultation on this, which concluded on Monday (January 22).
Assuming it does go ahead, we still don’t know what these final rules will look like, so this is absolutely not one to make knee-jerk decisions on.
For example, you may recall we urged people to hold fire when there was a rush to remove lump sums from pension pots because of fears the Chancellor would reduce the 25% tax free threshold? In fact, she didn’t and HM Revenue and Customs (HMRC) has since revealed that decision is irrevocable.
So despite some investors thinking they had a cooling-off period to change their minds, they didn’t, so a cautionary tale.
In any case, what DO you do to begin (carefully) considering how these IHT changes could affect what you leave when you pass away?
Firstly, very careful and considerable groundwork is needed to assess what retirement wealth clients have, what their needs are and (as much as we understand people may be reluctant) to consider honestly what their life expectancies are likely to be, taking into account any health issues, for example.
It may be one or both members of a couple will want to consider taking out money from their pensions and investing it elsewhere, but they would then pay Income Tax on that.
If it was invested in an ISA, perhaps say a Stocks and Shares ISA, it would remain part of the estate and be subject to IHT.
Gifting to children or grandchildren is certainly an option, with an annual exemption of £3,000 and on small gifts up to the value of £250.
Larger amounts can be gifted and remain exempt from IHT, providing the gifter survives for a minimum of seven years following the gift, otherwise tax will be due.
You can give tax exempt gifts under the ‘surplus income’ rule – though the ‘loophole’ has stringent conditions and detailed records must be kept.
Firstly it must be part of ‘normal expenditure’ ie the donor would need to make it a regular payment and not a one-off lump sum. Secondly it must come from ‘income’ – which would be from employment, property, pensions, interest and dividends, etc, not capital assets such as securities or jewellery.
Finally it must leave the donor enough to maintain a ‘normal’ standard of living.
All of this would need strong evidence and meticulous record keeping, because the executors of the estate would need to present it when claiming IHT exemption.
Another option might be to pay the gifts into trusts, but these can be complicated and will incur additional costs, so the decision needs to be carefully weighed.
As you can see, it is complex and depends greatly on individual needs of clients, their family situation, the amount and type of wealth involved and how dedicated all parties can be to the process, plus many other variables – one size certainly doesn’t fit all.
Please do take detailed professional advice before you embark on anything – and definitely do not rush into anything and a change of government may well, just change the tax rules back again!
