A new rule change will soon charge more than 31,000 Brits tax for the first time, while a further 121,000 see their bills rise. The tax office raked in the largest amount of quarterly inheritance tax money on record last month, pocketing a staggering £2.3billion between April and June. This marks a £92million increase on the same period last year.
Pensions to be dragged into taxable estates
It’s only going to get worse, with pensions soon to be dragged into taxable estates from April 2027. One person, spooked by the impending rule change, now has plans to quickly tie the knot with his partner after 35 years, to mitigate the tax liability on his daughter. Previously, he wouldn’t have had to worry about inheritance tax – let alone wedding planning.
While only a small portion of UK estates pay inheritance tax – you need to have an estate worth more than £325,000, or £1million if a married couple passing their main residence to children – more families are set to be dragged into the net. By 2030, an estimated 31,200 additional estates will fall within the scope, while more than 121,000 will see their tax bills rise.
Effective tax hit of up to 85%
If your estate is caught, loved ones face a standard 40% tax rate on everything above the threshold. What’s worse is if you die after age 75, passing on pension wealth could trigger both IHT and income tax for the recipient. For an additional-rate taxpayer, that creates an effective and eye-watering tax hit of up to 85%.
How to mitigate inheritance tax
There are a few things you can do to mitigate this, and it’s important to be proactive as the rules are strict. Start by adding up your total estate value – including property, savings, investments and pension wealth. If you exceed the threshold, gifting is one of the most effective ways to reduce your estate.
You can give away £3,000 per year completely tax-free. If you didn’t use last year’s allowance, you can carry it forward for one year. You can also give tax-free marriage gifts up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else. Under small gift allowance rules, you can give up to £250 per person per year to as many people as you like, provided you haven’t used another allowance on them.
In addition to this, larger gifts of any amount fall out of your estate entirely if you live longer than seven years. Finally, a lesser-known but very effective allowance called "gifts from surplus income" can be used to sidestep the seven-year rule entirely. It lets you give away unlimited amounts tax-free, provided the money comes out of your regular, post-tax income and doesn’t negatively impact your standard of living. It’s important to keep track of these gifts and be able to prove they haven’t compromised you, however.
New savings rate war
In better news, a new high street rate war has pushed top savings deals up to 8%, landing savers more than £100 in interest. Santander, Lloyds and the Bank of Scotland are leading the charge, offering the rate on their 'regular' savings accounts. These products usually lock down your cash and cap monthly deposits to earn the headline rate. However, Santander and the Lloyds Banking Group have scrapped the withdrawal penalties, giving you total flexibility. Santander customers can save up to £200 a month, pocketing a pot worth £2,504 after a year, including interest, while Lloyds and Bank of Scotland savers can put away up to £250 per month to pocket a pot worth £3,120 after a year, including interest.
If you're looking to put more cash away per month, you can snap up top easy-access rates of 5% with Revolut and LemFi for six months, before the extra bonus interest is removed and the rate drops. For accounts without bonuses, Cahoot’s Simple Saver offers 4.32% AER, and interest is paid monthly.
With inflation down at 2.6%, real returns for cash savers are at their highest level in years. Nearly 2,000 accounts are currently offering inflation-busting interest. Yet, an astonishing 62 million savings accounts are lagging behind. Data from savings app Spring shows 735,000 accounts holding more than £100,000 are earning a paltry 2.5% or less. By failing to move to a 5% deal, those account holders are forfeiting more than £2,500 extra a year in free cash.
