Legal ways to avoid inheritance tax after Rachel Reeves changes pension rules in Budget

THOUSANDS of families will be forced to pay inheritance tax for the first time after huge changes to death duties were announced in the Budget this week.

Rachel Reeves confirmed that inheritance tax will be charged on pensions from April 2027, which will close a loophole created by the previous government.

She also removed several exemptions for certain types of property, such as farms and family business assets.

This means some tax will be paid on assets worth more than £1million.

Meanwhile, the current inheritance tax thresholds will be frozen until 2030.

The threshold at which inheritance tax kicks in has been fixed at £325,000 since 2009.

Above this threshold households are stung by a 40% levy.

The changes mean ordinary households could be dragged into paying inheritance tax for the first time, which could see them tens of thousands of pounds worse off.

Only 5% of households currently pay inheritance tax - but that number will almost double by 2030 according to pensions group Canada Life.

But there are several legal ways to avoid paying inheritance tax.

Here we share seven tricks to help shield your family’s money from the taxman.

Check if rule change affects you

"Just because pensions will no longer be exempt from April 2027 does not necessarily mean your heirs will be slapped with a tax bill," warns Craig Rickman, Personal Finance Editor at Interactive Investor.

If the value of your pensions, when added to all your other assets, is below your lifetime tax-free threshold then no inheritance tax is due.

If you are married or in a civil partnership then you can get an allowance of up to £1million before you must pay inheritance tax.

Speak to a financial adviser to see how the new changes will affect you.

Give money away now

You can give away up to £3,000 worth of gifts each tax year without them being added to the value of your estate.

This is known as your “annual exemption”.

You can give gifts or money worth up to £3,000 to one person or split the £3,000 between several people every year.

Any unused allowance can be carried forward to the next tax year.

The tax year runs from April 6 to April 5 the following year.

You can also give £250 to as many people as you want each year, as long as you have not used another allowance to give cash to the same person.

Birthdays and Christmas gifts you give from your regular income are exempt from inheritance tax.

Wedding gifts

There is also an exemption which means you can give up to £5,000 to your child for their wedding without it being included in your annual giving allowance.

For a grandchild or great-grandchild you can hand over £2,500.

Meanwhile, for any other person it’s £1,000.

If you are giving gifts to the same person, you can combine your wedding gift allowance with your annual exemption.

For example, you can give your child a wedding gift of £5,000 as well as £3,000 by using your annual exemption in the same tax year.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: "It makes perfect sense to consider giving gifts during your lifetime, to reduce a potential bill.

"Sensible gifts can help support younger family members at a time when you’re still around to see your family enjoy the money."

Make sure to keep good records of any gifts you give to avoid any confusion, she adds.

Seven year rule

Inheritance tax is not due on any gifts as long as you live for seven years after you gave them.

This is known as the seven year rule.

If you do die within this timeframe, the amount of tax due will depend on when you made the gift.

Gifts given in the three years before your death are taxed at 40%.

Meanwhile, gifts given three to seven years before your death are taxed on a sliding scale which is known as “tapered relief”.

IHT is charged at 32% on gifts which are given three to four years before your death.

Gifts which were made four to five years before your death incur an IHT rate of 24%.

Meanwhile, gifts made between five and six years before your death incur a 16% charge.

The IHT rate falls to 8% after six years and disappears once seven years or more have passed since the gift was made.

Regular income

The taxman will not charge you for regular payments you make to loved ones, for example to help with their living costs.

This is known as “normal expenditure out of income”.

It can include paying rent for your child, paying into a savings account for a child under 18 or financially supporting an elderly relative.

There is no limit to how much you can give tax-free as long as:

• You can afford to make the payments after covering your usual living costs
• You pay from your regular monthly income

If you are giving gifts to the same person then you can combine your “normal expenditure out of income” with any other allowance, except for the small gift allowance.

For example, you could give your child a regular payment of £50 a month and use your annual exemption of £3,000 in the same tax year.

Craig Rickman said: "Giving money away may reduce your inheritance tax bill, but it’s important not to jeopardise your retirement lifestyle in the process.

"Not all sources of income qualify here though, so it’s important to check where you stand first."

Give money to charity

If you donate up to 10% of your estate to a charity in your will then the rate of inheritance tax which is due on your remaining wealth falls from 40% to 36%.

All charitable giving is tax-free, so any charitable donations will reduce your inheritance tax bill.

Set up a trust

If you transfer your assets into a trust you can help to reduce your inheritance tax bill.

Once the assets are held in a trust they are administered by a trustee or group of trustees on behalf of whoever stands to benefit from it.

For example, you could put some money into a trust for university for your grandchildren.

You would make your son or daughter a trustee and they would administer the money in the trust for the benefit of your grandchildren.

Once your assets are in a trust they are no longer considered to be part of your estate and are not considered when valuing it for IHT purposes.

All money in a trust is subject to the seven-year rule.

Placing your money into a trust can be complicated so you should speak to an expert before you do so.

Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.