The shake-up in Inheritance Tax rules announced by Rachel Reeves has sent ripples through those looking to pass on their wealth, prompting a festive flurry of generosity.
With pensions now on the radar for estate calculations from 2027, individuals are facing a looming spike in estate values.
Financial expert Gary Smith from Evelyn Partners raised the alarm: “More families will be drawn into the web of inheritance tax from 2027, and some of those will need to start planning now if they want to mitigate the effects.
“One possible reaction to suddenly finding that a whole chunk of money that was previously immune to IHT will now be added to the estate is to start giving it away during lifetime or spending it.”
Notably, retirees approaching or past 75 might dive into gifting and splurging but this could potentially be a big mistake on 2 fronts.
The expert warned Brits not to be pressured by the tax implications which could see them making hasty decisions.
He stressed the importance of ensuring that “sufficient funds in your pension for the rest of your retirement” are available before making any withdrawals.
Additionally, he warned that taking out large sums could lead to income tax liabilities, potentially pushing individuals into a higher tax bracket, negating any Inheritance Tax savings.
Instead, Gary advises sticking to the 25% tax-free lump sum from pensions for gifts or to boost a loved one’s pension.
He highlighted a savvy strategy: “If the recipient does not have an income, you can pay up to £2,880 into their pension in each tax year, topped up to £3,600 by basic-rate government tax relief.
“Even if they do earn and pay into a pension already, the extra funding will result in an extra gain in tax relief, and that is likely to be more beneficial to them, than leaving assets at death that could be taxed not just once but twice.”
