Proposed changes to Inheritance Tax (IHT) in 2027 will affect plans to pass on a good inheritance, whilst changes to Capital Gains Tax (CGT) are affecting sales of assets already, which could alter financial planning for retirement, or long term care costs.
Proposed changes to pensions and what to do about them
Traditionally, your pensions would be the last thing that you would touch, after drawing down on savings and ISAs. Using your savings, would reduce the overall taxable value of your estate, while preserving the pension to pass to future generations without being liable to 40% IHT.
This is currently under discussion and may change from 6 April 2027. While you can still draw down 25% of your pension as a tax-free lump sum (up to £268,275), any unspent pension will potentially be counted, and taxed, as part of your estate when you die from 2027.
What you could do…
Use your annual £3,000 IHT gifting exemption (£6,000 for a couple) to give money to family or loved ones during your lifetime, instead of as an inheritance. This will reduce the size of your estate over time.
- Make a gift of over £3,000. If however you die within 7 years of making the gift, the gift will be counted as part of your estate.
- Make regular monthly ‘gifts’ to family members, or cover some of their outgoings, such as childcare or school fees on a regular basis. These are tax free – so long as they’re genuinely made from disposable income and do not effect your own standard of living.
- Consider spending more of your pension pot on yourself, or others.
- Take out a Lifetime Assurance policy to help cover the eventual IHT bill.
Could you take out insurance to cover my IHT bill?
Another route to consider is to accept your IHT liability, but protect your family by planning for it. You could, if you have the disposable income, take out a whole of life insurance policy to cover off the anticipated bill. These policies last for your whole lifetime and pay out a tax-free lump sum to your family when you die. This lump sum can be used to pay the IHT.
Should you spend a bit more of your pension?
You’ve earned it, so you could consider treating yourself to an extra holiday, or spending it on other people - an opportunity to start moving wealth between generations. An offer to help cover nursery or school fees, mortgage repayments or health insurance from your disposable income as part of your gifting allowances, it’s potentially free from IHT.
Changes to Capital Gains Tax and what to do about them
Following the Budget, the lower rate of CGT has risen from 10% to 18% for basic rate taxpayers, and for higher rate taxpayers it’s increased from 20% to 24%. If you were planning to sell an asset in the short term or living off the proceeds of a sale as part of your retirement income plan, it’s time to think about what your options are.
What you could do
- Reconsider your timing. Do you need to sell all of the asset at once? If you spread the sale over several tax years, you won’t pay CGT so long as you stay within your CGT annual exemption which is currently £3,000 for the 2024/25 tax year.
- If you’ve got to sell, always ensure you use your full £3,000 CGT annual exemption. You can’t carry forward the allowance, but you can offset losses made in the current year and previous years against a gain. You need to declare all losses to HMRC on your tax return within four years after the end of the tax year in which you sold an asset.
- Gift some of the asset to your spouse or civil partner. There’s no CGT to pay on the transfer. When they sell, they’ll have their own CGT £3,000 exemption (any transfer must be on an outright and unconditional basis)
- If you need to sell, look at reinvesting your gain in tax-friendly places such as ISAs, JISAs or pensions
Next Steps
Don’t leave your future to chance, contact Chris Auld our Financial Advisor at H&H Wealth Management on 01228 936975 today to start mapping out a tax-efficient solution.
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