Jasmine Birtles aims to clear up the confusion in the weekly pensions and retirement Q&A. If you’d like to ask a question, please email money@gbnews.uk.
Question: “I am 68 and just retired, having sold a business last year. I have worked for myself for the last 15 years and have been successful. Unexpectedly I find that I am now one of the five per cent of people liable for inheritance tax
“I have invested heavily into Pensions ( A Self Invested Personal Pension ) I believed it would supply me with a good income and if I didn’t need the funds, my children , of whom I have 3, could benefit and in turn not be a burden on the state.
“I am divorced, I have a pension fund valued at £1.77million , a house free of mortgage, and investments. These total about £1.2million in addition.
“I haven’t started to take my pension and if I die today, the IHT liability will be about £280,000. Most people will think that to be a large sum.
“If I die after 2027 this will go up to £1,148,000 assuming that values are about the same. How can this be fair ? The tax bill has multiplied by a factor of 4 overnight. I have no problem with paying tax but this seems an outrageous increase.”
Jasmine replies: A lot of people are saying the same as you: they invested their money wisely with tax-efficiency in mind and thought their loved ones would be protected when they pass on.
But this Government seems determined to punish any individual or business that has the temerity to make money. Rather than make necessary cuts they are grabbing cash where they can through taxation.
What to do about it?
I spoke to by Chris McCrudden, founder of the law firm, LittleBitsOfLaw about your situation, and this is what he said:
“Given the negative response to the proposals (including from well-regarded wealth managers such as AJ Bell), the changes are not guaranteed to come into force.
“Instead, it may be that after the conclusion of the Government consultation on 22 January 2025, we see a more watered-down version. I know lots of professionals in the legal and wealth industry’s current advice is: do nothing until we know more.
“It’s important to understand your tax-free allowances:
- Everyone gets a £325,000 tax-free allowance, known as the ‘Nil Rate Band (NRB)’, which means the first £325,000 of your estate is free from IHT.
- If the total value of your estate is less than £2m, and you leave your main residence to your children or grandchildren, you also get a further £175,000 tax-free allowance, known as the Residence Nil Rate Band (RNRB). All in all, this means your tax-free allowances could total £500,000.
“My first thought would therefore be, how can we get your estate value down to £2m or less so we at least get the benefit of the extra tax-free allowance?
“Secondly, what strategies overall can help you further reduce your estate and therefore reduce the tax bill?
“My most common and favourite piece of advice to give to people like you is simple: spend some money! If you’ve got a bucket list, now is the time to start ticking some or all of it off and enjoy the fruits of your labour.
“My next advice to you would be: start making some gifts! You mention that your intention is to give to your children. Given you’re only 68, provided you’re in good health, you have a great opportunity to gift to your children now and not only when you pass away.
“Provided you survive for seven years after making the gift(s), there are no tax implications and the value of the gifts will not be included within your estate accounts when you’ve passed away (and therefore won’t be taxable).
“If you don’t feel like spending or gifting is the right way forward, perhaps consider a Trust. I often refer to Trusts as a ‘safety deposit box’ for your wealth, as they allow you to transfer assets out of your estate while still retaining some control over how they’re managed and who benefits.
“But beware … not all Trusts are tax-free. When you transfer assets into a Trust during your lifetime, anything above the £325,000 tax-free allowance (NRB) can be taxed at 20 per cent immediately on deposit. This is effectively half of the standard 40 per cent IHT rate. You also use up all your £325,000 tax-free allowance pre-death.
“If you survive for seven years after transferring assets into a Trust, those assets will be excluded from your estate for IHT purposes and your £325,000 is refreshed.
“Here’s the key part: If you pass away within three years of making the transfer into the safety deposit box, the full 40 per cent IHT rate is applied. But, since you’ve already paid 20 per cent on the transfer, your estate only pays the remaining 20 per cent, effectively bringing the total tax to 40 per cent. If you survive longer than three years, the IHT reduces on a sliding scale.
“It’s crucial to know that Trusts have other complexities and considerations too. It’s important therefore to emphasise, if you’re considering using a Trust to reduce IHT, tailored professional advice is essential.
“Finally, you could consider one of the many different financial products out there which may either reduce your IHT risk (annuities) or offset a significant part of the IHT due (life insurance in Trust products).
“These products require expert advice from someone with the relevant qualifications so be careful and ensure what you’re buying is the right solution for you and your circumstances.”
So, firstly don’t panic and don’t feel that you need to make a move quickly. It’s a wait-and-see game right now. But do get some professional advice as you have a good amount of money there and there are a few options for you to consider.
To find a good, recommended financial advisor in your area, try VouchedFor.
Jasmine Birtles is founder of the financial website MoneyMagpie.com. Sign up to her investing newsletter here.