The Chancellor has slapped death duties on businesses, pensions and farmland – as well as freezing the thresholds at which the tax kicks in.
The Office for Budget Responsibility (OBR) now expects the Treasury to rake in £66.9bn in inheritance tax by the end of the decade, £2.4bn more than previously forecast.
The tax grab, which will see revenue almost double under Labour, has led many wealthier citizens to change their inheritance strategies to avoid a huge tax bill for their heirs when they die.
“I’m just going to spend the money and enjoy it,” he said. “I’ve lost all reason to grow the business.”
The Government estimates that the changes to inheritance tax will drag more than 10,000 estates a year into paying the 40pc levy, and force about 40,000 estates to pay more tax. The OBR expects 9.7pc of estates to pay inheritance tax by 2029-30, up from 4pc today.
Unspent private pensions will be included in the inheritance tax calculation from April 2027. And from April next year, farms and businesses will be effectively taxed at 20pc above £1m, having previously been exempt.
This is what’s worrying Mr Perez. The change to business property relief (BPR) would cost his heirs an estimated £10m when he dies. A tax bill this big would force the firm to be sold or “kill it stone dead”.
Steve Perez, 68, is resorting to splashing his cash to avoid the Chancellor’s death duty raid
To guard against this possibility, Mr Perez has decided to take out life assurance for the next decade, costing him £100,000 a year. He is financing the payments by taking dividends from his company.
The policy would pay out around £6m if he were to die, and give his business a fighting chance of survival.
“This isn’t what I want to spend my money on. But I need to protect the legacy that I’ve built up over 25 years.”
£300k a year emergency life assurance
Mike Brundle is in a similar bind. The 51-year-old’s delivery service firm is worth £80m, but his heirs would face a £16m tax bill if he dies unexpectedly.
He is considering placing his assets into a trust, which would complicate the running of the firm, or spending £300,000 a year on life assurance to cover the premium.
Mr Brundle is unsure whether he would be able to use funds from his firm to pay the premiums. If not, he would have to draw the money as income and pay income tax on it.
“It’s a catch-22,” he said. “The threat of inheritance tax is so harmful to the economy – I’ve already cancelled a £6m construction project.”
Unspent pension savings have been shielded from tax for a decade, making them the perfect vehicle for transferring wealth down the generations.
Because of this, pension savings have often been the last asset used as a source of income in retirement. But the changes mean this logic has been flipped on its head.
From 2027, any unspent savings risk attracting a 40pc charge on death. Beneficiaries of those who die aged 75 or older could also face a double tax hit, as they may also have to pay income tax when the pension savings are withdrawn – meaning marginal tax rates of up to 90pc.
The most common way to pass on wealth without paying inheritance tax is the so-called “seven-year rule”. This allows for any assets passed on as “gifts” to be passed on tax-free if you live for at least seven years afterwards.
Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.
Until the seven years have passed, these gifts are classed as “potentially exempt transfers”. After three years, the rate of tax due reduces on a sliding scale.
‘I’m giving my pension to my grandchildren’
Melanie Lawson* is taking full advantage of the gift rule. The 75-year-old grandmother worked in computing for most of her 39-year career, building up a substantial state and private pension in the process.
Ms Lawson’s plan had been for her retirement nest egg to be kept intact in case she needed late-life care – and any remainder passed on to her two children.
She is now trying to draw down her pension wealth as tax-efficiently as possible to help her family swerve a 40pc tax bill when she dies.
She has already made cash gifts of £50,000 to two of her four grandchildren on the understanding the money is used to buy a house.
“I’ve worked hard all my life,” she said. “I’ve done the best for the kids, helping them both out. I begrudge the fact that my children are going to pay tax on what I leave them.”
Under current rules, savers can take 25pc of their pension pot tax-free from the age of 55 (rising to 57 from 2028), up to a maximum of £268,275. All other withdrawals are treated as income and taxed accordingly.
Ms Lawson ensures that her state pension and private pension incomes total less than £50,270 – the higher rate tax threshold beyond which earners pay 40pc of the next pound they earn.
How to give unlimited sums
Lisa Caplan, chartered financial planner at Charles Stanley, said that keeping withdrawals below this threshold was a “good rule of thumb”, as it ensures a marginal tax rate of just 20pc.
For this reason, Ms Caplan is encouraging some of her clients to spend their money instead of letting the taxman get it when they die.
“The joke is that parents are spending their kids’ inheritance on ski holidays – but why not do that and take the kids with you? Everything you spend effectively comes at a 40pc discount.”
Inheritance tax is levied at a rate of 40pc on all assets above a £325,000 threshold, known as the nil-rate band. The allowance increases by £175,000 when you leave your main residence to a direct descendents, such as children or grandchildren.
But this threshold is frozen while house prices have risen, reducing the real terms value of the allowance.
Estates worth over £2m also lose the “family home relief” at a rate of £1 for every £2 over the threshold, meaning the whole allowance is lost once the estate is worth over £2.35m.
One lucrative inheritance tax break is often overlooked. The “gifts out of surplus income” rule allows any taxpayer to give away unlimited sums of money without getting caught by inheritance tax – as long as the gifts do not diminish their quality of life and the money comes out of income, not capital (such as savings or investments).
Ms Caplan said: “If you have a pension, rent, dividends – as long as its income and not capital – you can give it away and it’s immediately outside your estate, as long as it is given away in an established pattern.
“The key to this is to keep detailed records. You also have to apply for this exemption.”
There are also gift allowances which mean you can give up to £3,000 each tax year and an additional £250 to as many people as you like. Couples who are married or in a civil partnership have their own rules: £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to everyone else.
As Ms Lawson is 75, her children will have to pay income tax on any of her unspent pension they inherit when she dies, after inheritance tax has been applied.
Because both her children are higher-rate taxpayers, they face losing 40pc of the pension to inheritance tax, then 40pc of the remainder in income tax, meaning a potential 64pc tax bill.
This has galvanised Ms Lawson to take full advantage of gift allowances. She makes regular payments of £250 each month to her son using money from her self-invested private pension (Sipp).
“I’m planning on there being no money left in my pension by the time I go. There will only be the house,” she said.
Steve Perez is wary about passing down his business as a gift, and blames the Government for forcing him into a difficult position.
“My son is a responsible young man, but he’s 25 – is it a good policy to encourage people to pass all business assets and the responsibility for 400 people’s jobs to a 25-year-old? It’s crazy.
“I’m frustrated – the Government doesn’t have a clue how a business works. I’d rather invest in my firm than buy a Ferrari, but I’ve been disincentivised.”
