Legal ways to avoid inheritance tax after Rachel Reeves changes pension rules in Budget
Date: 2024-11-01THOUSANDS of families will be forced to pay inheritance tax for the first time after huge changes to death duties were announced in the Budget this week.
Rachel Reeves confirmed that inheritance tax will be charged on pensions from April 2027, which will close a loophole created by the previous government.
She also removed several exemptions for certain types of property, such as farms and family business assets.
This mean some tax will be paid on assets worth more than £1million.
Meanwhile, the current inheritance tax thresholds will be frozen until 2030.
The threshold at which inheritance tax kicks in has been fixed at £325,000 since 2009.
Above this threshold households are stung by a 40% levy.
The changes mean ordinary households could be dragged into paying inheritance tax for the first time, which could see them tens of thousands of pounds worse off.
But there are several legal ways to avoid paying inheritance tax.
Here we share six tricks to help shield your family’s money from the taxman.
Give money away now
You can give away up to £3,000 worth of gifts each tax year without them being added to the value of your estate.
This is known as your “annual exemptionâ€.
You can give gifts or money worth up to £3,000 to one person or split the £3,000 between several people every year.
Any unused allowance can be carried forward to the next tax year.
The tax year runs from April 6 to April 5 the following year.
You can also give £250 to as many people as you want each year, as long as you have not used another allowance to give cash to the same person.
How much is inheritance tax?
YOU do not normally need to pay inheritance tax if the value of your estate is below the £325,000 threshold.
You can also avoid paying death duties if you leave everything above the threshold to your spouse or civil partner.
If you give away your home to your children – including adopted, foster or stepchildren – or grandchildren when you die, your inheritance tax threshold can increase to £500,000.
This is called the “main residence” band.
If you’re married or in a civil partnership and your estate is worth less than the £325,000 threshold then any unused allowance can be added to your partner’s when you die.
This means their threshold can be as much as £1million.
The standard inheritance tax rate is 40% – but it is only charged on the part of your estate that’s above the threshold.
For example, if your estate is worth £500,000 and your tax-free threshold is £325,000.
The inheritance tax charged will be 40% of £175,000 (£500,000 minus £325,000).
Birthdays and Christmas gifts you give from your regular income are exempt from inheritance tax.
Wedding gifts
There is also an exemption which means you can give up to £5,000 to your child for their wedding without it being included in your annual giving allowance.
For a child or great-grandchild you can hand over £2,500.
Meanwhile, for any other person it’s £1,000.
If you are giving gifts to the same person, you can combine your wedding gift allowance with your annual exemption.
For example, you can give your child a wedding gift of £5,000 as well as £3,000 by using your annual exemption in the same tax year.
What counts as a gift?
FOR inheritance tax purposes gifts include:
- Money
- Household and personal goods such as antiques, furniture or jewellery
- A house, land or buildings
- Stocks and shares listed on the London Stock Exchange
- Unlisted shares you held for less than two years before your death
A gift can also include any money you lose when you sell something for less than it is worth.
For example, if you sell your house to your child for less than its market value then the difference is considered to be a gift.
Anything you leave in your will does not count as a gift but forms part of your estate.
Your estate is all of your money, property and possessions which are left when you die.
The value of your estate is used to work out if inheritance tax needs to be paid.
Seven year rule
Inheritance tax is not due on any gifts as long as you live for seven years after you gave them.
This is known as the seven year rule.
If you do die within this timeframe, the amount of tax due will depend on when you made the gift.
Gifts given in the three years before your death are taxed at 40%.
Meanwhile, gifts given three to seven years before your death are taxed on a sliding scale which is known as “tapered reliefâ€.
IHT is charged at 32% on gifts which are given three to four years before your death.
Gifts which were made four to five years before your death incur an IHT rate of 24%.
Meanwhile, gifts made between five and six years before your death incur a 16% charge.
The IHT rate falls to 8% after six years and disappears once seven years or more have passed since the gift was made.
Regular income
The taxman will not charge you for regular payments you make to loved ones, for example to help with their living costs.
This is known as “normal expenditure out of incomeâ€.
It can include paying rent for your child, paying into a savings account for a child under 18 or financially supporting an elderly relative.
There is no limit to how much you can give tax-free as long as:
- You can afford to make the payments after covering your usual living costs
- You pay from your regular monthly income
If you are giving gifts to the same person then you can combine your “normal expenditure out of income†with any other allowance, except for the small gift allowance.
For example, you could give your child a regular payment of £50 a month and use your annual exemption of £3,000 in the same tax year.
Give money to charity
If you donate up to 10% of your estate to a charity in your will then the rate of inheritance tax which is due on your remaining wealth falls from 40% to 36%.
All charitable giving is tax-free, so any charitable donations will reduce your inheritance tax bill.
Set up a trust
If you transfer your assets into a trust you can help to reduce your inheritance tax bill.
Once the assets are held in a trust they are administered by a trustee or group of trustees on behalf of whoever stands to benefit from it.
For example, you could put some money into a trust for university for your grandchildren.
You would make your son or daughter a trustee and they would administer the money in the trust for the benefit of your grandchildren.
Once your assets are in a trust they are no longer considered to be part of your estate and are not considered when valuing it for IHT purposes.
All money in a trust is subject to the seven-year rule.
Placing your money into a trust can be complicated so you should speak to an expert before you do so.
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