The UK’s prime minister and chancellor are reportedly exploring options to change inheritance tax, with the aim of generating more revenue for the government. While there has been no indication as to how many people could be impacted by the changes or how much they might need to pay, a Budget announcement on 30 October is expected to provide further clarity.
At present, inheritance tax is set at a rate of 40% and applies to the money, property and possessions left behind by a deceased individual, as long as it is above the £325,000 threshold. The tax is levied on the portion of an estate that exceeds this figure, meaning that only estates valued over this amount are subject to inheritance tax. The tax currently raises approximately £7bn annually.
However, despite the tax being charged relatively infrequently (in 2021 it will be payable on just over 27,000 estates), just over a third of those polled by YouGov in July 2023 believed that the tax would apply to their assets when they die. Indeed, research from think tank the Institute for Fiscal Studies suggests that under the existing framework, 7% of estates could be subject to the tax by 2032.
Nevertheless, various exemptions currently exist that can reduce the tax liability of an estate. Those who leave their estates to a spouse or partner do not pay inheritance tax, while charities and some sports clubs are also exempt. Additionally, land used for farming purposes can be added to the estate’s threshold if it is included in the will.
One way to legitimately reduce inheritance tax is to use a trust, which can grant ownership of certain assets to a child or other beneficiary while protecting them from the tax. However, given the complexity of trust rules and obligations, it is advisable to seek professional guidance.
It remains to be seen how drastic any changes to inheritance tax might be and what impact they might have on public finances, the economy and individuals’ financial planning
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