Fight back against Sunak’s £37bn inheritance tax raid: use this ‘secret weapon’ now | Personal Finance | Finance

Taxpayers have a “secret weapon” in their arsenal, which can help them extricate a large chunk of their wealth from the clutches of Chancellor Rishi Sunak and the Treasury. However, many do not exercise this option, even though it is available to everyone.

In his Budget last March, the Chancellor froze the inheritance tax threshold (IHT) at £325,000 for five years. It will remain at that level, at least until 2026.

It has already been frozen since 2009, steadily increasing HM Revenue & Customs’ income as house and share prices rise.

Sunak also froze the zero-rate primary residence IHT threshold at £175,000 last year, which will draw more family households into the HMRC network.

Today’s figures show this is already having an impact, with IHT receipts rising £700m in the year to March 2022, to reach £6.1bn in total.

The Office of Budget Responsibility recent forecast that the Treasury will receive a staggering £37 billion in IHT payments over the next five years.

It’s time to fight back.

Julia Rosenbloom, a tax partner at Tilney Smith & Williamson, said the Treasury “needs every pound it can get right now” to meet its spending plans.

Families should take action and take a hard look at their tax planning and consider tips to reduce the impact on their wealth.

She said, “Families have the opportunity to reduce or eliminate their IHT bill by spending efficiently on taxes and giving gifts to family members.”

Steven Cameron, director of pensions at Aegon, said that families have a secret weapon at their disposal: their pension.

“Currently, funds held within most pensions remain outside of an individual’s estate for IHT purposes, while many other investments, including Isas, may be subject to IHT upon death.”

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IHT planning is complex, but making full use of your pension should be high on your list of ways to reduce your exposure, Cameron said. “There are many considerations about how best to save and invest, but if IHT is a concern, pensions offer a preferred approach.”

Upon retirement, many people prefer to spend other forms of savings first, such as cash or Isas, which may be subject to inheritance. They keep their pension in reserve, as this can be passed on to loved ones without IHT in the event of death if they don’t need it.

The inherited pension can be passed on entirely tax-free if the policyholder dies before age 75, although if they die later, the beneficiaries may have to pay income taxes at their marginal rate. However, the pension rules are complicated.

There are constant rumors that Sunak will scrap this hugely valuable IHT pension benefit so that the retirement savings will be subject to inheritance tax upon death.

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Cameron said such a move would be unfair. “When saving for a pension, the vast majority of people are doing so to provide an income for themselves and a partner, in retirement, rather than to pass on an inheritance.

“Bringing accumulated pension funds or ‘death benefits’ into an individual’s taxable estate at death would seem particularly harsh and unwarranted.”

Cameron said the government wants to encourage more people to save more on pensions, and creating a possible IHT liability “would be highly counterproductive.”

As the rules stand, investing in a pension is a sensible way to avoid Sunak’s inheritance tax, although people should consider other options, such as gifting.

Cameron added: “This is a complex area and we recommend seeking professional financial advice.”

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