By James Thomson ATT CTA, Tax Manager

With the October 2024 Budget fast approaching, rumours are circulating that Chancellor Rachel Reeves is planning changes to Inheritance Tax (IHT) as part of a wider effort to raise up to £40 billion through tax hikes and spending cuts.

While specifics have yet to be confirmed, these potential changes could have a significant impact on families, particularly those with substantial estates, and may alter how inheritance is taxed.

Understanding the implications of these changes, especially if they affect the rules surrounding IHT, is important for anyone looking to protect their family’s financial future.

Current Inheritance Tax rules

Inheritance Tax is currently levied at 40 per cent on the value of estates over the £325,000 threshold.

Estates passed between spouses or civil partners are not subject to IHT, regardless of their size.

For estates that pass to children or other beneficiaries, only the portion exceeding £325,000 is taxed.

Additionally, certain reliefs and exemptions can further reduce IHT liabilities, such as those for certain lifetime gifts, transfers to trusts, homes passing on death to direct descendants, and legacies for charities.

However, with changes potentially on the horizon, many families may need to reassess their inheritance planning strategies.

Could the seven year rule and other reliefs be affected?

While the exact details remain unclear, reports suggest that the Government is considering tightening the rules on gifts given during a person’s lifetime.

Currently, gifts made more than seven years before death are exempt from IHT, but this exemption could potentially be lengthened, bringing more gifted assets into the Inheritance Tax net.

There are also concerns that existing reliefs for businesses and agricultural land could be limited or scrapped altogether.

These measures are part of an effort to target wealthier individuals, especially as the Labour Government has pledged not to raise Income Tax, VAT, or National Insurance for working people.

As the Chancellor looks for new ways to increase tax revenue, here are some steps to help protect your assets from rising tax liabilities.

Review your estate plan

With the potential for changes, it is a good idea to regularly review your estate plan.

Ensure your strategy takes advantage of the current rules and be prepared to adjust your plans if the Government announces reforms in the upcoming Budget.

Consider making gifts early

If you are planning to leave a substantial inheritance, making gifts early can help minimise the tax burden on your estate.

Gifts made more than seven years before death are currently exempt from IHT, but if the Government extends this time frame, acting sooner rather than later could preserve your estate’s value.

Utilise IHT reliefs while available

For those with business interests or agricultural land, it is important to take advantage of reliefs like Business Relief (BR) and Agricultural Relief (AR) while they are still in place.

Given that these exemptions may be reformed or scrapped entirely, now is the time to consider passing on these assets.

Maximise the £325,000 tax-free allowance

Each individual has a £325,000 tax-free allowance for IHT, with married couples and civil partners able to combine their allowances for a total of £650,000.

Structuring your estate to maximise this allowance can help minimise the amount subject to tax, particularly if the threshold is not increased in future reforms.

Plan for unmarried couples

If you and your partner are not married or in a civil partnership, you won’t benefit from the same IHT exemptions.

We can advise on legal and financial planning strategies, such as using trusts, to help reduce the tax burden on your estate when it passes to an unmarried partner.

Consider setting up trusts

Trusts can be a valuable tool for managing inheritance and controlling how assets are distributed.

Depending on the outcome of the Budget, setting up trusts could help protect your estate from rising IHT liabilities and ensure your beneficiaries are not unduly burdened by tax.

Those considering trusts should seek advice before also making gifts to individuals, as it is often to settle trusts prior to making gifts to individuals.

Stay informed about Capital Gains Tax

Alongside potential changes to IHT, there have been rumours of Capital Gains Tax (CGT) reforms.

With CGT receipts on the rise, it is possible that tax rates on capital gains could be increased in the Budget.

If you are considering selling assets, now may be the right time to assess the potential tax implications.

Prepare for future tax increases

As Chancellor Rachel Reeves has indicated, tax hikes are likely on the way.

To safeguard your financial legacy, you should plan for future tax increases, particularly if you fall into the category of wealthier individuals who may be targeted by the Government’s new measures.

Preparing for the October 2024 Budget

While we await further details from the Chancellor, it is clear that Inheritance Tax could be reformed in the near future.

These changes could have a lasting impact on how families manage their estates.

By planning ahead and making use of the strategies outlined above, you can mitigate the effects of potential reforms and ensure that your family is financially protected for the future.

For further advice and strategies on how to manage your estate for tax purposes, please contact us today.