Key changes to the tax are coming in soon
A tax is being expanded soon(Image: Getty)
HMRC has subtly lifted tax bills over the years, resulting in people paying thousands more. This pertains to an extremely unpopular tax that will be broadened from next year.
Significant changes are on the horizon for inheritance tax. The 40 per cent tax is set to expand from April 2027 to include pensions within its scope. Martin Lewis recently discussed this change on his BBC podcast. You can avoid the tax as long as your estate’s value falls within certain allowances. However, some of these allowances have remained static for many years, pulling more people into the tax net as property prices and other asset values have risen.
Hannah Martin, pensions expert and founder of Rich Retiree, argued there is a case for raising the allowances as inflation pushes up prices. She said: “The nil-rate band has been fixed at £325,000 since 2009, and will remain frozen until at least 2030.”
Tax-free allowances
Each person can pass on up to £325,000 in total assets tax-free, with an additional £175,000 applicable to your home if you’re passing it on to a direct descendant, such as a child or grandchild. Any unused allowances can be passed on to your spouse or civil partner upon your death.
The £325,000 allowance would have increased to more than £525,000 had it kept pace with inflation, saving families affected by the 40 per cent tax over £80,000.
However, another element of the tax has been set in stone for a much longer period. Ms Martin said: “The £3,000 annual inheritance tax exemption on gifts has been in place since 1981.”
One way to decrease your inheritance tax liability is by making donations. You can gift up to £3,000 each tax year, split among any number of people, tax-free. Additionally, you can distribute any number of gifts up to £250 to different people, provided you don’t utilise your other gifting allowances on those same individuals.
In 1981, legislation was enacted to raise the gifting allowance from £2,000 to £3,000, during Margaret Thatcher’s tenure as Prime Minister, with Geoffrey Howe as Chancellor. If this had risen in line with inflation, the allowance would now be worth over £11,600.
Simplifying the tax system
This implies you could donate an additional £8,600 in gifts annually, saving your estate £3,440 in inheritance tax liability. Ms Martin suggested that the inheritance tax system could be improved by simplifying the allowances.
She proposed: “Some suggestions include simplifying the multiple allowances system we currently have, which includes a nil-rate band, residence nil-rate band, spouse exemption and gifting exemptions, and instead replace them with a single, larger tax-free allowance per person.
“This would simplify the administration of taxing, make it easier for people to understand, and remove early gifting to avoid the seven-year rule.” Outside of your yearly gifting allowances, you’re able to give away any sum tax-free provided you live for seven years following the gift.
