Inheritance tax is emerging as one of the biggest financial fears for retirees ahead of next week’s Budget, with 15 per cent of retired people saying possible reforms are their number one concern.
The finding reflect rising anxiety that death duties could rise again.
Government inheritance tax receipts hit a record £8.2billion in 2024/25, a milestone Sarah Coles, head of personal finance at Hargreaves Lansdown, describes as "the country’s most hated tax".
However, the reality is that most families are not currently affected. HMRC data shows only 4.62 per cent of estates actually paid inheritance tax in 2022/23.
Even so, speculation about further reforms is fuelling concern. Ministers are understood to be reviewing the rules around "potentially exempt transfers", which allow people to give away unlimited sums during their lifetime without inheritance tax, provided they survive for seven years.
Treasury insiders have discussed placing limits on how much can be gifted under this system.
The government is also reviewing taper relief provisions, which currently reduce inheritance tax rates on gifts exceeding the nil rate band when death occurs within seven years. Abolishing this relief would create what experts describe as a "cliff edge" in the tax system.
Additionally, extending the survival period for potentially exempt transfers from seven to ten years remains under consideration. Such a change would complicate estate planning and potentially increase the number of estates liable for inheritance tax.
Treasury officials are also evaluating potential modifications to annual gift allowances and regulations governing regular donations from income. These allowances have remained static for several decades, limiting their effectiveness and potential revenue impact from any changes.
Adjustments to the standard nil rate band of £325,000 and the residence nil rate band of £175,000 for property passed to descendants are possibilities, though such moves would prove highly contentious. These thresholds provide crucial protection for modest estates.
Adjustments to the standard nil rate band of £325,000 and the residence nil rate band of £175,000 for property passed to descendants are possibilities
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The introduction of capital gains tax charges at death represents another option under review. Currently, inherited investments outside ISAs and pensions benefit from a CGT reset, effectively eliminating accumulated gains. Officials may view this as an untapped revenue source, particularly given recent reductions to annual CGT allowances.
Those concerned about potential reforms can take immediate protective measures within existing rules.
Annual gift allowances permit transfers of up to £3,000 per year, whilst unlimited smaller gifts of £250 can be made to different recipients.
Larger transfers remain possible under current regulations, with inheritance tax exemption applying after seven years' survival. Starting such transfers promptly allows the qualifying period to commence sooner.
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From 2027, pension pots will no longer be exempt from inheritance tax | GETTY Regular donations from surplus monthly income offer another route for tax-free giving, provided donors maintain their standard living expenses. Meticulous documentation of these transfers is essential to satisfy HMRC requirements.
Ms Coles emphasises the importance of balanced planning: "Giving away too much, too soon, can end up doing more harm than good if you don't have enough money to fall back on later in retirement."
For those seeking more sophisticated estate protection, Junior ISAs present an attractive option for supporting younger family members. Annual contributions of £3,000 qualify for immediate inheritance tax exemption whilst remaining inaccessible until the child reaches eighteen.
Parents and grandparents comfortable with such extended timeframes may find these particularly appealing.
| GETTYJunior SIPPs offer longer-term benefits, with funds locked until retirement but potentially delivering substantial growth through decades of compounding. Parents and grandparents comfortable with such extended timeframes may find these particularly appealing.
Converting existing investments into stocks and shares ISAs through bed and ISA transactions helps shield assets from potential CGT charges at death. Annual capital gains realisation prevents accumulation of taxable gains.
Complex arrangements involving joint life annuities funding whole of life insurance policies placed in trust can remove assets from estates whilst ensuring beneficiaries receive tax-free payouts.
Professional guidance is advisable for such strategies to ensure compliance with regulations.