What A New ‘Death Tax’ Could Mean For You

With Andy Burnham reportedly considering the introduction of a “death tax” to help pay for planned social care improvements, now is the time to understand how it could affect the wealth you hope to pass on to your family.

Read on and understand:

• What a ‘death tax’ is;
• The possible consequences of a death tax on your finances;
• Whether a death tax could be costly for you or your loved ones;
• What steps you can take right now to get ahead of any possible announcement.

What is a ‘death tax’?
“Death tax” is not an official tax name. It is a political label used for a tax charged on someone’s money, property and other assets after they die. But it isn’t one particular thing – it could be applied in a variety of different ways.
The idea of a death tax has been back in the spotlight recently after reports claimed Andy Burnham is considering an ‘estate levy’ – a particular type of death tax – as one option to fund a new, planned National Care Service.

Your ‘estate’ is everything you leave behind when you die, after any debts you owe have been paid back. Your estate could include your home, possessions, any copyrights or digital assets you have, plus any savings and investments in your name.
Putting a tax on the entire estate someone leaves behind would make it different from the current system of Inheritance Tax, which is usually only levied on the part of a person’s estate that falls outside of the tax-free allowances.

Currently, Inheritance Tax starts at £325,000, which means individuals are allowed to pass on £325,000 without any tax being deducted. There’s also a possible extension to that, which allows a family home to be passed on as well, taking the total individuals can bequeath tax-free to £500,000. Married couples and civil partners get twice this allowance so can potentially pass on up to £1 million to their loved ones.

Above those amounts, Inheritance Tax is normally charged at 40%.

An estate levy could work very differently.

Depending on the way it is designed, it could potentially bring many more estates into the tax system than Inheritance Tax currently catches.

That means, for many people who previously thought they would be unaffected by post-death taxes, things may be about to change.

How might a death tax affect your finances?

Right now, we’re just guessing at what the exact rules could be. We will probably have to wait until the Autumn Budget (or beyond) for those details.

But let’s imagine someone dies leaving an estate worth £400,000.

Under the current Inheritance Tax allowance system, that estate could pay no tax at all. But if a future estate levy charged 10% on the whole amount (one proposal being suggested), the tax bill for the surviving family members could theoretically total £40,000.

This is only an illustration. What we don’t know right now is whether a future ‘death tax’ policy would:
apply from the first pound of an estate;

• include a tax-free allowance;
• exempt transfers between spouses and civil partners;
• treat the family home differently;
• replace existing Inheritance Tax;
• or be charged on top of it.

Depending on your family and financial circumstances, getting an answer to each one of those questions could potentially make an enormous difference.

For example, a broad levy could mean that more ordinary families pay tax when someone dies, particularly those whose wealth is mainly tied up in their home.

On the other hand, a lower flat rate ‘estate levy’ could potentially reduce the bill for some people who have very large estates and are currently facing Inheritance Tax at 40%.

There is also another important point to bear in mind: The purpose of the suggested levy would be to fund a more generous social care system. Your estate might, therefore, pay out more in death taxes, but less in care costs during your life thanks to a more generously funded care system that doesn’t require you to cash in your investments, or sell your home, for example.

Reports suggest Mr Burnham is considering reforms ranging from free personal care to a more comprehensive service, but the funding model has not yet been decided.

What steps could you take right now to protect your estate?
It is tempting to try and get ahead of the rumours. But plenty of people have attempted to jump before the starting gun has been fired in recent years – and ended up regretting it.

You should not, for example, rush to give away your home, withdraw your pension or move large sums of money purely because of newspaper speculation. Tax rules could change in any direction, and acting too early could leave you financially worse off.

Right now, this is all just speculation. However, there are some sensible steps you can take now.

Review your estate planning

Regular reviews of your estate planning is sensible, but it’s especially important when something changes – whether that’s a change in your family circumstances, your health, or government tax policy.

Work out what your estate is worth

Add up the approximate value of your:

• home and other property;
• savings;
• investments;
• pensions that may fall within your estate*;
• business interests;
• valuable possessions;
• and life insurance payable to your estate.

Then subtract any mortgages and other debts.

This gives you a rough idea of the value your family might inherit and whether Inheritance Tax and the future changes could affect you.

* From April 2027, most unused pension pots will become subject to the same Inheritance Tax rules as your other assets. Death-in-service benefits and certain pensions paid to surviving dependants under defined benefit schemes will remain outside the reach of Inheritance Tax.

Make or update your will

A will explains who should receive your assets after you die.

Without one, your estate will be distributed under fixed legal rules, which may not reflect your wishes.
Marriage, divorce, the birth of children, buying a property or a major change in wealth are all good reasons to review or update an existing will.

Check out our podcast episode Future-Proofing Your Finances For The Later Years  for tips on wills and financial planning for later life.

Check your pension nominations
Pensions are not normally distributed according to your will.
You should therefore check that you’ve completed ‘expression of wish’ or ‘beneficiary nomination’ form with each of your pension providers, showing who you would like to receive the pension after your death.

Keep records of gifts
Under the current Inheritance Tax system, some gifts made during your lifetime may fall outside your estate if you survive for seven years after they were gifted. There are also specific exemptions for smaller gifts and regular gifts made from surplus income.

However, the rules can be complicated to understand, and a future estate levy might not treat gifts in exactly the same way, so it’s worth keeping an eye on this one and speaking to a professional for personalised advice.
Whatever your circumstances, everyone should keep clear records showing:

• what money you gifted;
• who received it;
• when it was given;
• and whether it was made from your normal income or your existing capital.

Consider professional advice before making large gifts

Giving assets away can reduce the value of your estate, but it also means giving up ownership and control.
You cannot normally give away your home but continue treating it as entirely your own and assume it will escape tax. This can fall under rules known as a gift with reservation of benefit, meaning the asset may still be counted as part of your estate.

Large gifts can also create Capital Gains Tax, care-fee and financial-security issues. Again, the rules here can be hard to understand so it’s best to speak to a professional if you have questions on this.

Make sure you retain enough for yourself

Tax planning should never leave you unable to fund your own retirement, emergencies or care.

You do not know how long you will live, what care you might need or what future tax rules will look like.

The goal should be sensible estate planning rather than trying to remove every possible pound of tax.

If you’re unsure of how the rules impact you or need tailored guidance, use our IFA finder to put you in touch with an FCA-regulated independent financial adviser.