As we move into 2025, significant changes to inheritance tax and capital gains tax are on the horizon. These adjustments have the potential to impact estates, beneficiaries, and wealth transfer strategies. Understanding these changes is crucial for ensuring your assets are protected and distributed according to your wishes. In this blog, we will explore the implications of these upcoming reforms and provide actionable steps you can take to safeguard your estate.
Understanding the Changes to Inheritance Tax and Capital Gains Tax
Inheritance Tax (IHT)
Inheritance tax has long been a point of contention, and the anticipated reforms are designed to address perceived inequities. Key changes include:
- Extending the Gifting Rule
The current seven-year rule for gifting assets before death to avoid IHT may be extended to ten years. This means gifts made up to ten years before death could be subject to IHT, increasing the importance of long-term estate planning. Currently, gifts over the annual £3,000 exemption made within seven years of death can attract tax rates ranging from 8% to 40%, depending on the time elapsed since the gift.
- Reduction in Tax-Free Allowances
There is speculation that the nil-rate band (currently £325,000, unchanged since 2009) may be frozen until 2028, effectively reducing its value in real terms due to inflation. The residence nil-rate band, currently £175,000, could also face similar restrictions.
- Review of Agricultural and Business Reliefs
Reliefs that currently exempt up to 100% of agricultural and business assets from IHT could be scaled back or tightened. In 2022-2023, over £3 billion worth of assets benefited from these reliefs, highlighting their significance for family-run businesses and farms.
Capital Gains Tax (IHT)
Capital gains tax changes could also affect estates, particularly with regard to:
- Abolishing the "Death Uplift"
Currently, assets passed on at death are revalued to their market value for CGT purposes, eliminating gains made during the deceased’s lifetime. Removing this “death uplift” would mean beneficiaries inherit the original acquisition value, potentially increasing their CGT liability when they sell inherited assets. This could result in significant tax bills, as CGT rates are 10% for basic-rate taxpayers and 20% for higher-rate taxpayers on most assets, or 18% and 28% for residential property. This has not been abolished, but it is under consideration as part of broader discussions around tax reform in the UK.
- Lower CGT Allowances
The annual CGT exemption has already been reduced from £12,300 in 2022-2023 to £6,000 in 2024-2025 and is set to drop further to £3,000 in 2025-2026, meaning more gains will be subject to tax.
Implications for Estates and Beneficiaries
These changes could significantly alter the financial landscape for both estates and beneficiaries. Key implications include:
- Higher Tax Bills for Beneficiaries
With potential reductions in tax-free allowances and the removal of the death uplift, beneficiaries could face increased tax liabilities, reducing the value of their inheritance. For example, the average inheritance tax bill in 2022-2023 was over £215,000, and this figure could rise sharply under the new rules.
- Complex Probate Processes
Executors and beneficiaries may have to navigate more complex tax rules, leading to potential delays and increased administrative burdens. HMRC reported that over 275,000 estates required probate in 2023, and delays in processing could grow if tax regulations become more intricate.
- Impact on Asset Liquidity
Families may need to sell inherited assets, such as property or shares, to cover tax liabilities, potentially disrupting plans to keep assets within the family. This is particularly significant given that property makes up over 60% of the average estate value in the UK.
- Strain on Family Businesses
Changes to agricultural and business reliefs could force families to sell parts of their businesses to meet tax obligations, undermining the continuity of family enterprises. Small and medium-sized businesses contribute over £226 billion annually to the UK economy, emphasizing the broader implications of these reforms.
Steps to Protect Your Assets and Beneficiaries
To mitigate the impact of these changes, consider the following strategies:
- Start Planning Early
Given the potential extension of the gifting rule, early planning is essential. Make use of the annual gift allowance (£3,000 per year) and other exemptions, such as wedding gifts (£5,000 for a child, £2,500 for a grandchild) or regular gifts out of surplus income.
- Utilise Trusts
Trusts can be a powerful tool for estate planning, allowing you to transfer assets outside of your estate while maintaining some control. For example, discretionary trusts can hold assets worth up to £325,000 (or £650,000 for couples) without immediate IHT charges, making them an effective strategy for reducing taxable estates.
- Review Your Will
Ensure your will reflects your current wishes and takes into account potential tax changes. A well-drafted will can help minimize IHT liability and ensure your assets are distributed as intended. Over 50% of adults in the UK do not have a valid will, leaving their estates vulnerable to intestacy rules.
- Consider Lifetime Gifts
Making gifts during your lifetime can reduce the value of your estate and, consequently, the IHT burden. However, with the gifting rule potentially extending to ten years, it is crucial to plan these gifts carefully. HMRC data shows that gifting before death has saved families millions annually in IHT liabilities.
- Maximise Use of Reliefs and Exemptions
Take advantage of available IHT reliefs, such as business relief and agricultural relief, while they remain in place. If you own a business or farm, seek professional advice to structure your estate in a tax-efficient manner. In 2022, these reliefs saved UK estates over £1 billion in IHT.
- Insurance Policies
Life insurance policies placed in trust can provide funds to cover IHT liabilities, ensuring that your beneficiaries do not have to sell assets to pay the tax. For example, a policy worth £500,000 could cover a substantial portion of the average IHT bill.
- Diversify Assets
Consider diversifying your investments to include assets that may benefit from lower tax rates or exemptions. For instance, pensions are typically outside of the estate for IHT purposes and can be a tax-efficient way to pass on wealth. UK pension wealth reached £6.4 trillion in 2022, making it a significant consideration in estate planning. From April 2027, pensions will be considered inside the estate for IHT purposes which presents a greater risk of IHT. However, there are IHT bonds available that attract business relief, meaning that after 2 years of investment the bond is free of IHT.
- Seek Professional Advice
The complexities of IHT and CGT demand expert guidance. Engage with financial planners, tax advisors, and estate planning solicitors to develop a comprehensive strategy tailored to your circumstances.
- The Role of Communication
Open communication with your beneficiaries is critical. Discuss your plans with family members to manage expectations and ensure they understand the implications of the changes. Clear communication can also prevent disputes and foster collaboration in managing your estate.
What’s Next?
Estate planning is a complex but essential process, particularly in light of upcoming changes to inheritance tax and capital gains tax. By starting early, utilising trusts and reliefs, and seeking professional advice, you can safeguard your wealth and ensure your beneficiaries receive what you intend. Don’t wait for the new rules to take effect—take action today to protect your legacy.
For tailored advice and assistance with estate planning, contact a qualified professional (like Will Protect!), who can guide you through this evolving landscape. With careful planning, you can navigate these changes and achieve peace of mind knowing your assets are in good hands.
References
For anyone who may be facing an increased IHT or CGT risk we’ve included the sources that we’ve used for this article for further reading:
- Chartered Institute of Taxation (CIOT), 2024. Expert commentary on legislative proposals affecting IHT and CGT. Available at: https://www.tax.org.uk
- Financial Conduct Authority (FCA), 2024. Guidance on pensions and investments in estate planning. Available at: https://www.fca.org.uk
- Financial Times, 2024. “How to protect your wealth from tax changes”. Available at: https://www.ft.com
- HMRC, 2023. “Inheritance Tax Statistics”. Available at: https://www.gov.uk/government/collections/inheritance-tax-statistics
- HMRC, 2023. “Capital Gains Tax Receipts”. Available at: https://www.gov.uk/government/statistics/capital-gains-tax-statistics
- Office for National Statistics (ONS), 2023. “Wealth and Assets Survey”. Available at: https://www.ons.gov.uk
- PwC, 2024. “Navigating Estate Planning in 2025”. Available at: https://www.pwc.co.uk
- Society of Trust and Estate Practitioners (STEP), 2024. “Planning for Family Businesses”. Available at: https://www.step.org
- The Times, 2024. “Tax Trends in Estate Planning”. Available at: https://www.thetimes.co.uk
- The People’s Pension, 2024. Inheritance tax (IHT) changes on pensions from 6 April 2027. Available at: https://thepeoplespension.co.uk/support-for-pension-scheme-members/know-your-pension/pension-basics/inheritance-tax-iht-changes-on-pensions-from-6-april-2027
- Octopus Investments. Business relief explained.Available at: https://octopusinvestments.com/resources/guides/business-relief-explained/
