After years of hard work and saving, some people manage to build an impressive estate to pass along to their loved ones. Unfortunately, when it comes to taxes, especially inheritance tax, nothing and no one remains untouched. Now, there may be more bad news for cohabiting families, as some could soon be punished by a heartbreaking £82,000 due to a major change. Find out today what this change entails, who it will impact, and how much it could break the bank in the future.
Breakdown of inheritance tax in the UK
It is important to think of a plan for the future, especially regarding inheritance. While it is a sensitive subject, understanding the ins and outs of inheritance is vital, especially when it comes to Inheritance Tax (IHT). According to the UK Government’s official website, IHT is a 40% tax on an estate, i.e. property, money, and/or possessions, of a loved one who has recently passed.
According to Myers and Co Solicitors, a common and lawful approach to decreasing your estate’s value is by gifting, such as:
- Giving away up to £3,000 every tax year
- Gifting £250 per person annually
- Gifting from surplus income if it doesn’t affect living standards
- Larger gifts may be exempt if you survive for seven years after gifting
Now, major changes are underway when it comes to inheritance tax, with Labour Party Chancellor Ms Reeves leading the way to tighten inheritance tax rules. Ms Reeves also plans to stop some of the gifting loopholes, but the latter is fortunately still under discussion.
New tax grab will be bad news for cohabiting families
Some inheritance can be passed on tax-free, such as unspent pensions of a deceased loved one under the age of 75. Now, that will fall away following the changes announced in the Budget. Soon, even if someone has passed before reaching pension age, those pension savings will contribute towards a person’s estate for IHT purposes, unless covered by existing exemptions, according to BirminghamLive.
Cohabiting families with young children will primarily be affected, especially if they do not benefit from the spousal exemption or a transferable nil-rate band. According to John Greer, Quilter retirement policy head:
“Without change, this policy risks compounding the emotional toll of bereavement with a financial hit that can destabilise a family’s future despite raking in very little in additional revenue.”
Understanding the new IHT bills that will be implemented soon
An English single homeowner of a home priced at £290,395 with pension savings of £415,000 could now face an IHT bill of £82,158. Cohabitating families typically jointly own a property, so only half of the property value is part of the estate. Such a family will face an IHT bill of £24,079, purely because of the pension inclusion. A deceased sole owner will have a bill three times higher.
According to the Quilter’s report, this will be the IHT per country and government office region:
- England
- £82,158
- £24,079 (Joint ownership)
- Northern Ireland
- £40,015
- £3,007 (Joint ownership)
- Scotland
- £42,771
- £4,385 (Joint ownership)
- Wales
- £49,832
- £7,916 (Joint ownership)
- East Midlands
- £62,821
- £14,410 (Joint ownership)
- East of England
- £101,899
- £33,949 (Joint ownership)
- London
- £192,255
- £79,127 (Joint ownership)
- North East
- £29,657
- £0 (Joint ownership)
- North West
- £49,799
- £7,900 (Joint ownership)
- South East
- £118,260
- £42,130 (Joint ownership)
- South West
- £87,695
- £26,847 (Joint ownership)
- West Midlands Region
- £63,705
- £14,852 (Joint ownership)
- Yorkshire and The Humber
- £47,534
- £6,767 (Joint ownership)
Understanding that pension savings will contribute towards one’s estate for IHT purposes is vital, as it will assist you in planning for the future. This new change will be official from April 2027, so it should give British people enough time to get all their ducks in a row. As Ms Reeves plans on continuing to tighten the inheritance tax rules, ensure that you stay up to date with the latest changes, as this could assist you in saving an extra pound or two, while staying well within the law, of course!
Disclaimer: Our coverage of one-off payments, support payments, tax reliefs, tax refunds, tax credits and other payments is based on the official sources listed in the article. All payment amounts and dates, as well as eligibility requirements, are subject to change by the governing institutions. Always consult the official source we provide to stay up to date and obtain information for your decision-making.
