How to Avoid Inheritance Tax Under the New 2024 Rules

https://inheritance-tax.co.uk/avoid-inheritance-tax-under-the-new-2024-rules/

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The October 2024 changes to inheritance tax (IHT) rules in the UK have brought new complexities to estate planning. For families with substantial assets, such as pensions and farms, understanding these updates and adjusting strategies accordingly is essential to minimising tax burdens on beneficiaries. This blog explores the key changes introduced by the inheritance tax new rules and effective strategies for navigating them, focusing on tax-efficient pension withdrawals, trust planning for farms, and comprehensive estate management.

Key Changes in IHT Rules and Their Implications

The 2024 inheritance tax new rules have introduced significant changes that impact a broad range of estates. Here are the three key changes to be aware of:

• Inclusion of Unused Pension Funds in Estates: Starting in April 2027, unused pension funds will be included in a person’s estate for IHT purposes. This could subject those funds to a 40% IHT rate if the total estate value exceeds the nil-rate band (NRB). This move aligns pension assets with other inherited assets, eliminating their prior advantage as a tax-efficient vehicle for wealth transfer under the inheritance tax new rules.
• New Reporting Obligations for Pension Scheme Administrators (PSAs): The inheritance tax new rules require PSAs to report unused pension assets and pay IHT directly to HMRC. This new obligation lifts the burden from personal representatives (PRs) but adds a layer of complexity that requires careful coordination between PRs and PSAs to ensure accurate IHT calculations and compliance.
• Extension of the Freeze on the NRB and RNRB Until 2030: The NRB, set at £325,000, and the residence nil-rate band (RNRB), held at £175,000, will remain unchanged until 2030. This prolonged freeze contributes to fiscal drag, where rising property and asset values increase the tax exposure of estates without corresponding increases in the thresholds. As a result, more estates will become liable for IHT or face higher tax bills under the inheritance tax new rules.

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Tax-Efficient Pension Withdrawals

• Using the 25% Tax-Free Lump Sum: One of the most straightforward ways to reduce IHT exposure is to withdraw the 25% tax-free lump sum from a pension. This reduces the value of the estate that could be subject to IHT and provides liquid assets for beneficiaries. This strategy aligns with the inheritance tax new rules, helping to reduce the taxable estate.
• Consulting an Independent Financial Adviser (IFA): After the initial tax-free withdrawal, further pension drawdowns should be planned with the assistance of an IFA. Professional guidance from firms such as Thornton & Baines can help retirees identify the most tax-efficient way to withdraw pension funds, ensuring compliance with the inheritance tax new rules and minimising the overall tax burden.
• Preparing for New Pension Reporting Requirements: The obligation for PSAs to report and handle IHT payments directly means that pension holders and their families need to collaborate with PSAs and PRs to meet the reporting requirements accurately. Understanding these new inheritance tax new rules is key to smooth estate administration.

Trust Planning for Farms

• The Role of Trusts in IHT Planning: Trusts can be a powerful tool for farm owners looking to minimise IHT. By transferring farm assets into a trust, families can maintain control over these assets while removing them from the taxable estate. This reduces the estate’s value and potentially shields it from IHT, especially under the inheritance tax new rules.
• Selecting the Right Trust: Choosing the appropriate trust type is essential to meet the needs of the family and estate. Options such as discretionary trusts and interest-in-possession trusts come with distinct benefits and considerations. Properly structured trusts ensure that the estate plan is aligned with the inheritance tax new rules and optimised for IHT relief.
• Maximising Agricultural Property Relief (APR): Farm assets may qualify for Agricultural Property Relief, which can provide up to 100% IHT relief if they meet specific criteria. This can significantly reduce the IHT burden, but eligibility must be maintained through active use of the land for agricultural purposes. Planning with an experienced advisor can help ensure APR qualifications are met and maintained, in accordance with the inheritance tax new rules for farms.

Comprehensive Strategies for Reducing IHT Exposure

• Integrating Pension and Farm Planning: For estates that include both pension assets and agricultural property, a coordinated approach is essential. Combining pension withdrawal strategies with trust planning for farms ensures that all available IHT reliefs are maximised, reducing the taxable value of the estate under the inheritance tax new rules.
• Leveraging Lifetime Gifting: Strategic gifting during one’s lifetime is another effective way to reduce the taxable estate. Gifts made more than seven years before death are typically exempt from IHT, while smaller annual gifts within the tax-free allowance can add up over time to create significant IHT savings under the new inheritance tax rules.
• Seeking Expert Advice: Given the changes to inheritance tax new rules and the impact of the NRB freeze, consulting with an inheritance tax planner or estate advisor is more important than ever. Expert guidance ensures that all strategies, from trusts to pension drawdowns, are executed in line with the new regulations and optimised for minimal IHT exposure.

Conclusion

The 2024 inheritance tax new rules, including the inclusion of unused pension funds in estates, new reporting obligations for PSAs, and the extended freeze on the NRB, make proactive estate planning essential. Strategies such as tax-efficient pension withdrawals, trust planning for farms, and strategic lifetime gifting can help families protect their assets and maintain their legacy. Working with experienced advisors, like those at Thornton & Baines, can provide the tailored support needed to navigate this evolving tax landscape and ensure your estate plan is compliant and efficient.

Act now to review and adjust your estate planning strategy to align with the inheritance tax new rules and safeguard your family’s future.

https://inheritance-tax.co.uk/avoid-inheritance-tax-under-the-new-2024-rules/