Have you got a pensions and retirement question you’d like Jasmine to answer? Get in touch by emailing money@gbnews.uk.
Question: “I’m a widower and I’m really worried about inheritance tax changes. I have a house which is worth around £600,000 and a reasonably-sized pot of savings.
“Am I allowed to give my money to my children and grandchildren or will the taxman be after me?”
Yes it’s understandable that you would be concerned about inheritance Tax (IHT) changes as you want to make sure that your children and grandchildren benefit fully from your wealth.
Actually Chancellor Rachel Reeves made fewer changes to the IHT rules in the Budget than were expected. The main change, as far as you are concerned, was to announce that unused pension pots would be included in a deceased person’s estate for tax purposes from April2027. Currently pension pots are not included in the estate.
However, for more specific information on your situation I spoke to Ian Cook, chartered financial planner at Quilter Cheviot.
He said: “I’m sorry to hear about your concerns regarding inheritance tax (IHT) changes, especially during such a challenging time. It’s entirely understandable to worry about how these changes might affect your ability to pass on your assets to your children and grandchildren.
“Currently, each individual has a nil-rate band of £325,000, meaning the first £325,000 of your estate is exempt from IHT. In addition, there is a residence nil-rate band of £175,000 if you pass your primary residence to direct descendants, bringing the total potential exemption to £500,000 per person.
“For married couples or civil partners, any unused allowance can be transferred to the surviving partner, potentially allowing a combined exemption of up to £1 million
“The recent budget has extended the freeze on these thresholds until 2030. With property values and savings typically rising over time, more estates may become liable for IHT as the thresholds remain static.
“This ‘fiscal dragd means that, even without acquiring additional assets, the value of your estate could exceed the tax-free limits, leading to a 40 per cent tax on any amount above the threshold.
““From April 2027, unused pension funds will also be included in your estate for IHT purposes. Pensions have historically been outside the scope of IHT. This change means that any remaining pension funds at the time of your death could now face a 40 per cent IHT charge if your estate exceeds the nil-rate bands.
“To help mitigate IHT liabilities, you can take advantage of the annual gifting allowance. Each tax year, you are allowed to gift up to £3,000 without it being included in the value of your estate. If you haven’t used the previous year’s allowance, you can carry it forward, giving you a potential £6,000 to gift in one year. Making regular gifts to your children and grandchildren not only reduces the size of your estate but also helps pass wealth to your family in a tax-efficient way.
“Another option to consider is contributing to Junior Individual Savings Accounts (JISAs) for your grandchildren. You can contribute up to £9,000 per child per tax year into a JISA, and these contributions are treated as gifts. The money grows tax-free and becomes accessible to the child when they turn 18.
“This can be a great way to support their future education or life goals.
“If you wish to make larger gifts beyond the annual allowance, these may still be exempt from IHT if you live for seven years after making them.
“This is referred to as the ‘seven-year rule.’ Should you pass away within seven years, the gifts would be subject to a sliding scale of tax relief, known as “taper relief,” which reduces the IHT payable depending on how much time has passed since the gift was made.
“Given the complexities of IHT planning, it would be wise to consult a financial adviser. They can conduct a cash flow modelling forecast to determine how much money you will need for your retirement and any potential care costs in the future. This will provide clarity on how much of your estate you can afford to gift while ensuring your own financial security is not compromised. An adviser can also help you develop a structured gifting plan to maximise allowances and reduce IHT exposure.
“Additionally, the use of trusts is worth exploring as part of your estate planning. Trusts can be an effective way to transfer wealth while maintaining a degree of control over how it is used. For example, you might want to protect assets for future generations or ensure that funds are only used for specific purposes, such as education.
“A financial adviser or solicitor specialising in estate planning can guide you on the best type of trust for your circumstances and how it can help mitigate IHT.”
Also, Laura Hutchinson, managing partner at tax consultancy Forbes Dawson gave this advice:
“Fortunately, in the situation you describe, the inheritance tax changes announced at Autumn Budget may not negatively impact you.
“You do not include the value of your savings, so it is difficult to give definitive advice but provided your personal savings, including any personal pension pot if you die after 5 April 2027, are worth less than £400,000 on death, your estate is unlikely to suffer any inheritance tax.
“As a widower, assuming your late wife transferred all her assets to you on her death, you will be entitled to her nil rate band allowance of £325,000, along with your own allowance of the same amount. This offers you relief of £650,000.
“It is extremely likely that you will also have both your late wife’s and your own residence nil rate band allowance, totalling £375,000. This is the allowance specifically introduced to help to pass the house to your descendants, but it is tapered for larger estates over £2m, and down to nothing if your estate is worth more than £2.7m.
“Combined, these allowances amount to £1m, so keeping your assets under this value is important to avoid inheritance tax.
“If your total assets exceed £1m now, or you expect them to grow above this level, giving some cash away in lifetime is a good idea if you can afford to do so. Provided you survive seven years, the gift will drop out of assessment to inheritance tax.
“It is recommended to seek tax advice if you want to give away other investments, such as stocks and shares, as there will be capital gains tax implications of doing so, despite you receiving no consideration.
“Do not give any part of your house away whilst you continue to live there, as this will not work for inheritance tax.
“If you receive a lot of income from your investments that is surplus to your needs, you could also consider making regular gifts out of the excess income every year to your children and grandchildren. This will help restrict the growth in your estate and again there is no requirement to live for seven years for this to be effective.
“As with any tax planning, it is important that you seek advice from a qualified professional who will navigate the best route for your personal circumstances.”
So the good news is that there are still quite a few ways that you can reduce the amount of Inheritance Tax that your children and grandchildren will have to pay when you pass on.
If you have a good chunk of wealth to pass to them then, as Ian suggests above, it would probably be a good idea to pay a financial advisor to help you arrange things properly.
