Four ways to protect your finances from inheritance tax changes & leave more cash to relatives

YOU may be worried about how inheritance tax will affect your finances and pension after huge changes were announced in the Budget.

But plenty can still be done to plan ahead, says Charlene Young, a pensions and savings expert from AJ Bell.

She said: “Having an open discussion with your loved ones about what you’d like to happen will save them extra stress when the time comes.”

Adele Cooke explains what is happening, how to protect your pension and how to plan ahead . . . 

WHAT IS CHANGING?

IN her first Budget, Chancellor Rachel Reeves extended the “death tax”, announcing that inheritance tax will be charged on pensions from April 6, 2027.

When someone dies, inheritance tax is charged on their estate, including property, savings and now pensions.

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

Above this threshold families are stung by a 40 per cent levy.

Last week, the Chancellor extended the freeze on thresholds until 2030.

Meanwhile, exemptions for certain types of property, including farms and family businesses, will also be removed from April 2026.

However, there are exemptions that raise the threshold higher, including passing on the family home.

As a result of the changes, around 10,500 people will have to pay the charge for the first time, according to financial company Interactive Investor.

WILL IT AFFECT YOUR PENSION?

UNDER certain circumstances, yes it will, but rules have not yet been finalised on how inheritance tax on pensions will work, and revisions could happen before they come into force.

So there is time to get your finances in order before the changes come into effect.

HOW TO PASS ON CASH TAX-FREE

IF you give your home to your children or grandchildren then the threshold at which you start to pay inheritance tax increases to £500,000.

If you are married or in a civil partnership then any unused allowance can be transferred to your partner when you die.

As a married couple, if you pass on your family home to direct family members then your estate can be worth £1million before you pay inheritance tax.

Another option is to give money away now.

But Craig Rickman, personal finance editor at Interactive Investor, warns that it is important to make sure you have enough money for your retirement first.

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

You also have to give the money away seven years or more before you die for it not to be subject to inheritance tax.

On top of this, you can give away up to £3,000 worth of gifts tax-free each year as part of your “annual exemption”.

Any unused allowance can be carried forward to the next year, but just for one 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 from your regular income are free from inheritance tax.

Plus you can give a wedding gift of up to £5,000 to your child, or £2,500 to your grandchild, tax-free.

Speak to a financial adviser before you give away large sums of money to ensure you have enough for your own retirement.

WHAT HAPPENS TO YOUR FINANCES WHEN YOU DIE?

THE amount of inheritance tax your beneficiaries will pay depends on the total value of your estate, the age at which you die and their income tax rate.

If you are in debt when you die then any money you owe will be paid out of your estate.

The person who is dealing with your estate will be responsible for settling your debts.

If the debts are joint then the surviving person will need to pay them.

If you die before you have spent everything from your pension pot then any remaining money will be paid to your beneficiaries and may be taxed.

Now is the time to speak to your loved ones about your finances and where your money is kept so that it is less stressful for them later.

Put together a financial fact sheet and include your bank account details, pension and gas and electricity providers to help them manage your affairs once you pass away.

Compile a list of all of your possessions and any money you have to calculate how much it is all worth.

Make sure that your will is up-to-date and your family knows where these documents are stored.

You can get a free will this month through the Will Aid scheme.

• See willaid.org.uk or call 0300 0300 013.