Inheritance tax set to rise – here’s what it means for you

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Chancellor Rachel Reeves is said to be considering modifications to inheritance tax in the upcoming Budget, aiming to generate as much as £40 billion through increases in taxes and reductions in spending.

Although the details are not fully known, any alterations could greatly impact the expenses families incur for inherited properties and their overall financial wellbeing.

Here’s all the essential information regarding the possible changes and their implications for your family.

What Is Inheritance Tax? Explained Simply

Inheritance tax is a tax imposed on the assets of a deceased person. However, only about four percent of families actually pay this tax since the majority of estates are valued below the exemption limit.

The important point about this exemption is that any assets passed on to a spouse or civil partner are completely free from inheritance tax, no matter how much the estate is worth. For example, if someone leaves their whole estate, even if it's worth a million pounds, to their partner, there will be no inheritance tax applied.

However, this exception does not apply to couples who cohabit but are not married or in a civil partnership.

Every person is entitled to an inheritance tax exemption of £325,000. If an estate is valued at or below this amount, it will not be subject to tax. However, any value exceeding this limit is taxed at a rate of 40 percent.

What Changes Might Be Ahead?

According to the BBC, the government is looking at various options to boost its income, especially given a reported budget deficit of £40 billion.

While specific details about exemptions and reliefs are still pending, conversations are taking place about reviewing the current regulations regarding gifts made while someone is alive.

According to existing rules, if someone gifts more than £325,000 and passes away within seven years, those gifts might still be subject to inheritance tax for the people who receive them.

The new Budget may include targeted relief measures for businesses and agricultural land that currently benefit from tax exemptions.

Nonetheless, it's still uncertain how far-reaching the new changes are.

What Did The Government Say?

A number of ministers, along with the prime minister, have assured that taxes won’t increase for "working individuals." This implies that the wealthier groups are expected to bear the brunt of the new measures.

Before her first budget announcement, the chancellor did not dismiss the possibility of increasing capital gains and inheritance taxes.

Creating a backdrop for a harsh financial report, she commented, "I believe we will need to raise taxes in the upcoming Budget."

Ms. Reeves didn't mention which specific taxes would increase, but she assured that Labour would adhere to its campaign promise not to raise national insurance, VAT, or income tax.

The chancellor stated, "Our manifesto included a promise to establish fiscal rules that would ensure our daily spending matches our tax income. Additionally, by the end of the projected timeline, we aim to reduce debt as a percentage of GDP."

"These are reasonable financial guidelines to manage public funds effectively. We also promised in our manifesto that we wouldn’t raise national insurance, VAT, or income tax for the duration, and we intend to uphold that promise."

Shadow Chancellor Jeremy Hunt took aim at Labour's financial proposals, stating, "Throughout the election, we consistently pointed out that Labour’s calculations were incorrect and that they intended to increase taxes. The true issue is that, even though they were always planning these tax hikes, they lacked the bravery to be upfront about it with the public during the campaign."

"Sadly, it seems that those who have spent their entire lives saving to leave an inheritance for their loved ones will be the ones affected by Labour's tax increases."

What Does This Mean For You?

For families looking to manage their estates, these possible changes will require individuals to take a closer look at their financial planning.

If the rates for inheritance tax go up or the exemptions change, people planning to pass on an inheritance might have to reevaluate their choices to reduce tax responsibilities.