One of the biggest announcements to come out of the autumn budget was the proposal to make certain types of pension known as defined contribution subject to Inheritance Tax (IHT). The rules, which are set to come into force in 2027, bring to an end a period of time where pensions could be passed down generations in an extremely tax efficient manner.
So, will this change have an impact on how people use their pensions now? And will they be looking to spend the cash they had once earmarked for loved ones? A key point is that the final rules have not been confirmed yet, so we will continue to provide further briefings as the situation becomes clearer.
Making large pension withdrawals could push them over an income tax threshold, leaving them with a bigger bill. So, while they might decide to give family a bit of a treat like a holiday, they won’t want to hike up their spending over a sustained period of time.
At the end of the day, no one knows how long they will live, and they don’t want to risk running out of money that they may need.
The key change we are likely to see among those who do have an IHT issue is people looking to give money away while they are alive rather than leaving it in their wills.
Gifts of any size will pass out of your estate after seven years with no IHT to pay. People will start making plans on how to do this so they can get that seven-year clock ticking.
In addition, we will see people making use of the various gifting allowances available. One example is the £3,000 annual exemption – a limit that has been frozen for decades. You can also give away as many small gifts of up to £250 to as many people as you wish, but this cannot be the same person who received the £3,000. Plus, there are gift allowances for when loved ones get married.
For those with larger potential liabilities the “gifting out of surplus income” rules will come in handy. In this case there’s no limit to how much you can give tax free, as long as you can afford the payments after meeting your usual living costs and you can pay from your regular monthly income. The idea is that you don’t reduce your own standard of living to make these payments. Keeping records and evidence of surplus income is key.