Families warned over ‘significant’ HMRC tax bill increase

The new rules are coming in soon

People are being urged to check whether they could face a substantial HMRC bill in the coming years. Financial advisers have warned that certain people will see a large rise in their tax obligations as fresh regulations take effect.

In its inaugural Autumn Budget of 2024, Labour revealed plans to broaden the scope of inheritance tax. The 40 percent levy applies to the overall value of inherited assets you receive above certain thresholds. Historically, one method of avoiding this tax has been to transfer your wealth via private pensions.

These have not previously been counted as part of your estate for inheritance tax calculations. Nevertheless, from April 2027 onwards, the tax will be extended to encompass unused pension funds.

Wealth management company Saltus reports that many clients have expressed concerns regarding the upcoming tax changes Alex Pugh, a chartered financial planner at the firm, explained: “We are having this conversation with every client that could be affected, so 100 percent of clients. No one has said they’re unconcerned about it.

“Everyone wants to understand the potential implications for their estate.” Ms Pugh said that making pensions subject to inheritance tax could lead to substantial bills for many people.

‘Significant’ tax increase

She said: “In many cases, clients’ largest assets are their property and pension, so bringing pensions into the inheritance tax net can significantly increase potential liabilities. However, while clients are interested in exploring their options, in practice, there can be limits to what can be done.

“Many still need these assets to fund their retirement, so they’re understandably cautious about making drastic changes purely to mitigate tax.” She said that a primary worry among their clients concerns how the regulations will specifically affect their individual circumstances.

Ms Pugh said that further clarification from the Government is required regarding how exactly the tax will be calculated and collected. She said: “It has been indicated that personal representatives of an estate will be responsible for calculating the inheritance tax liability and informing pension providers of the amount due.

“However, the exact processes and administrative steps involved are still evolving, and more detail will be needed so executors and advisers know exactly how this will work.” She was also asked how the inheritance tax system could be improved.

Tax planning can be complex

The financial planner said: “One of the biggest improvements would be greater simplification. The system currently contains many layers and nuances, from gifting rules to different allowances and tapers, which can make planning complex.”

Every individual receives an allowance enabling them to transfer up to £325,000 in total assets without incurring tax, alongside a £175,000 allowance when bequeathing their primary home to a direct descendant.

Any unused allowances can be transferred to your spouse or civil partner, potentially enabling them to pass on as much as £1million in assets tax-free upon their death. A piece of research conducted by Saltus found that inheritance tax is seen as one of the most unreasonably steep levies in the UK.