Chancellor refuses to cut inheritance tax - and take is forecast to soar to £10bn

Today's Autumn Statement did not include a proposal to reduce the inheritance tax, since it was revealed that it is expected to generate almost £10 billion annually by the close of the decade. The Chancellor avoided making any cuts to the tax.

For several weeks, there were speculations that Jeremy Hunt had intentions to decrease the 40% rate or boost the thresholds of the 'death tax.' However, the proposed overhaul of the 'death tax' was deferred.

The most recent HMRC information covering April through October revealed that inheritance tax payments reached a total of £4.6 billion. This is an increase of £500 million when compared to the corresponding period from the previous year.

Handing down riches: A small fraction of around 4% of all households are subject to an inheritance tax, with approximately 27,000 families paying this tax during the 2020/21 fiscal year.

Next, statistics from the Office for Budget Responsibility indicated that the tax revenue of £7.1 billion estimated for 2022/23 is set to rise up to £9.8 billion by 2028/29, which marks a growth of 38 percent.

Around 4% of households are subject to inheritance tax, which equates to roughly 27,000 in the 2020/21 fiscal year. Despite this, it's not a popular tax among the public because many view it as being levied on death, assets, and the instinctual inclination to pass on one's wealth to future generations.

At the same time, the number of receipts has increased greatly due to frozen limits and the rise in property prices, which is causing more people who have lost a loved one to fall into this category.

Here are ten legal ways to prevent having to pay a large amount of inheritance tax: 1. Make use of the nil rate band – a set amount of money that is exempt from inheritance tax. 2. Give away assets and money while you are alive to reduce the value of your estate. 3. Use trusts to distribute your assets and reduce their value for tax purposes. 4. Leave a charitable donation in your will – donations to registered charities are usually exempt from tax. 5. Consider making small gifts throughout your lifetime – these will not be subject to inheritance tax. 6. Leave assets to your spouse or civil partner – there is usually no tax payable on gifts between spouses or civil partners. 7. Make use of the residence nil rate band – an additional exemption for the value of a family home left to direct descendants. 8. Invest in AIM shares – certain types of shares are exempt from inheritance tax. 9. Take out life insurance to cover the cost of IHT. 10. Seek professional advice to ensure your estate is structured in a tax-efficient way.

According to officials in the government, they decided not to implement reductions in the inheritance tax because they were afraid Labour would accuse them of giving money to the wealthy. However, they may revisit the concept before the Spring Budget.

The upcoming election may see the Conservative party making a pledge to eliminate inheritance tax entirely, as a tactic to gain more support from voters.

"Reducing The Inheritance Tax Burden: Tips And Strategies"

Who Pays Inheritance Tax And How Much?

If you are unmarried, you must possess a value of at least £325,000. However, if you are married or in a civil partnership, you must have a joint value of £650,000 before your family members are required to pay inheritance tax.

The 'nil rate band' is the term used to refer to this limit.

However, there is an additional substantial exemption that raises the limit to a combined £1 million if you are in a relationship, possess a house, and plan to pass down money to your children or grandchildren.

This is commonly referred to as the 'residence nil rate band'.

When an individual's estate reaches the £2 million mark, their own home allowance will gradually decrease by £1 for every £2 beyond this limit. If their estate surpasses the £2.3 million mark, the allowance will be completely removed.

In case your net worth surpasses a certain amount, the Government will require your inheritors to surrender 40% of the assets that exceed the established limit.

According to Quilter, a financial services company, their calculations show that...

If the inheritance tax rate was reduced to 20%, families who have enough money to pay this tax could potentially save a whopping £15.4 billion within the next three years.

Reducing the inheritance tax from 40% to 30% would result in a significant loss of £7.7 billion to the Treasury if it were to benefit those who inherit larger fortunes.

Increasing the threshold from £325,000 to £500,000 for all individuals would lead to a savings of £6 billion for families from 2024/25 till 2027/28. This benefit would no longer be restricted to parents who own a home.

Lowering the main tax percentage from 40% would result in the equal amount of estates being subjected to inheritance tax, but the expense of the tax would be smaller.

If the threshold is increased, it would result in approximately 12,500 families each year being exempt from paying inheritance tax.

Inherited Pensions Get A Break

The intention of enforcing stricter tax regulations for inherited pensions of those who pass away before reaching the age of 75 has been abandoned by the Government, which was set to commence in April of 2024.

If the owner of a pension dies before reaching the age of 75, those who inherit the pension will not be required to pay any taxes on it, as long as it does not exceed the allowance limit set by the deceased. However, if the owner passes away after the age of 75, beneficiaries will be subject to their standard income tax rate.

The Treasury sought advice on whether to impose income tax on the amount taken out from pension funds inherited from individuals who are younger savers as well.

Despite this, it was possible to evade taxes if individuals received a large sum of money by opting for cash payments rather than receiving it through a pension. Financial specialists cautioned that this might establish a biased motivation that may result in unsound choices.

One possible way to rephrase this paragraph is: Beneficiaries may choose to receive a one-time payment instead of regular income from an inherited pension to save money on taxes. Similarly, some individuals may decide to start receiving their pensions earlier to prevent their family members from being taxed on the pension income.

The proposed alterations are being discussed by the Government as they consider the potential effects of removing the lifetime allowance in the previous budget.

Hunt decided to eliminate the maximum cap of £1,073,100 for pension funds that could be accrued without tax penalties starting from April 6th. However, the foundational regulations still need to be addressed.

No Pension Tax Horror, Thankfully!

Pension professionals have expressed their approval for the announcement that the regulations for individuals who receive pensions as an inheritance from those who pass away prior to the age of 75 will remain unaltered.

Jon Greer, the head of retirement policy at Quilter, has stated that there is good news for pension holders. The government has confirmed that these pensions will continue to be exempt from tax until April 2024, which maintains the same level of treatment they currently receive.

This is great news! If the government had followed through with the modification to the tax rules, people would have been encouraged to take all their remaining funds as a one-time payment, which is not taxed up to the maximum available lump sum and death benefit allowance of £1,073,100.

This announcement indicates that there will be a comparable approach after the elimination of the lifetime allowance. However, it appears that the limits on the tax-free status of the amounts used to provide pensions for recipients will not be constrained. We are eager to learn more specifics once the Finance Bill is released.

Hargreaves Lansdown's retirement analysis leader, Helen Morrissey, warns that getting rid of the lifetime allowance poses significant challenges and potential unexpected issues.

There was a possible nightmare scenario concerning inherited pensions, but fortunately it was prevented. This situation occurred when an individual passed away prior to reaching the age of 75.

At present regulations, these retirement funds can be handed down without any charges for inheritance or revenue taxes. This varies from the situation after attaining 75 years of age when revenue taxes are expected.

Earlier this year, documents proposed that the government might alter the current situation and make the policy the same for people before and after the age of 75.

This raised worries that individuals who receive pension inheritances might be inclined to receive their pension in a large, one-time payment rather than opting for regular income payments. Additionally, people may consider taking their pension distributions early to avoid their family members being charged an income tax on it.

It's really great news that the changes won't happen as it could have led to financial planning complications for people.

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