Inheritance Tax can be a complicated financial situation with new changes adding confusion (Image: GETTY)
Inheritance Tax (IHT) can often be a complex financial issue for many families to navigate, especially with the upcoming changes announced by Rachel Reeves last October set to take effect from next month.
To help demystify these updates and their potential impact on your family, probate specialist Josh White from highlighted the four significant upcoming changes to IHT expected to take effect in the next few years:
- A new residency-based tax is set to be introduced in April 2025
- Certain farms and businesses will fall within the scope of IHT starting April 2026
- Pensions are to be included under IHT beginning April 2027
- The freezing of the IHT threshold is due to end in 2030
As a result of these changes, by 2030 the number of families paying IHT could double to one in 10 UK families facing this significant tax, which is currently charged at a rate of 40%.
:
Josh delved into the details of the first adjustment that will come into play next month: “Essentially, something called ‘non-domiciled (or non-dom) status’ will no longer exempt individuals from paying IHT on their foreign assets. Instead, tax will be based on their residence.
“A new ‘Long-Term Resident’ (or LTR) rule is being introduced, which means that anyone who has been resident in the UK for 10 of the last 20 years will be subject to IHT on their worldwide assets. Meantime, non-LTRs will only be taxed on their UK assets.
“Even LTRs planning to leave the UK will still be taxed on worldwide assets for up to 10 years. This rule change is set to affect approximately 9,300 individuals per year.”
For instance, the incoming legislation will impact those with offshore trusts, which were traditionally excluded from IHT. Under the new rule, if the settlor, the person adding to the trust, qualifies as an LTR and leaves the UK the trust will still be liable for IHT for 10 years and it be subject to exit charges.
Don’t miss… [UPDATE]
The expert pointed out: “Naturally, everyone affected will want to keep the potential bill as low as possible, but with various previous loopholes closing, it’s not going to be easy, so preparing in advance could really help your loved ones down the line.”
Josh, detailing forthcoming alterations regarding agricultural and business assets, said: “This change means that families can still pass on up to £1 million in agricultural and business assets to loved ones tax-free, but above £1m, assets will now face IHT at a 20% rate, half as much as the usual 40%.
“Previously, small farms could be passed down through generations without IHT liability.”
This imminent change has seen farmers making headlines as they voice their concerns in recent months.
Government estimates suggest around 500 farms annually will be hit by this revision, yet the National Farmers Union claims that the actual figure could reach an astounding 70,000 farms.
Further adding to future IHT burdens, Josh explained that defined contribution pension plans will be included in estate valuations from April 2027.
The inclusion of these pensions in estate calculations could lead to nearly 40,000 estates incurring higher IHT costs, taxed at the standard rate of 40%.
More information about Inheritance Tax can be found on the.