As we approach April 2025, significant changes to the UK's Stamp Duty Land Tax (SDLT) and Inheritance Tax (IHT) are set to take effect. These reforms will impact property transactions and estate planning, which could impact homeowners who are contemplating later life lending options or downsizing. Understanding these changes and how they might affect you is crucial to making informed decisions that align with your financial goals.
Stamp Duty Land Tax (SDLT) changes, effective from April 2025
Stamp Duty Land Tax is a tax on property purchases in England and Northern Ireland. The upcoming changes, effective from 1 April 2025, will alter the thresholds and rates, affecting the amount payable on property transactions.
Key changes to be aware of:
- Reduction of the rate threshold: The current SDLT exemption on properties valued up to £250,000 will decrease to £125,000. Consequently, properties priced above £125,000 will incur SDLT charges. For example, purchasing a property at £250,000 after April 2025 will attract a 2% SDLT on the amount between £125,001 and £250,000, resulting in a £2,500 tax liability.
- First-time buyer relief adjustments: The SDLT exemption threshold for first-time buyers will reduce from £425,000 to £300,000. Additionally, the maximum property value eligible for first-time buyer relief will decrease from £625,000 to £500,000. This means first-time buyers purchasing properties above £300,000 will face higher SDLT charges than in previous years. Though this may not affect you directly, it is worth considering how it may affect your children and grandchildren if you plan to support them with purchasing their first home.
Implications for those considering downsizing
If you're contemplating downsizing, the revised SDLT thresholds could influence your financial planning.
- Increased tax liability: With the reduction in the rate threshold, more property transactions will be subject to SDLT. For instance, selling a larger home and buying a smaller one valued at £200,000 would now incur a 2% SDLT on £75,000 (the amount above £125,000), amounting to £1,500.
- Impact on property value: The increased SDLT may affect property prices, as buyers factor in additional costs. This could influence both the sale price of your current home and the purchase price of a new one.
How might this affect later life lending?
Later life lending options, such as equity release, allow homeowners to access the equity in their property without the need to sell. The SDLT changes may have indirect effects on these options.
- Equity release: While equity release itself isn't subject to SDLT, the overall property market influenced by SDLT changes could affect property valuations, thereby impacting the amount of equity you can release.
- Purchasing a new property: If you're considering using equity release funds to purchase a new property, the revised SDLT rates will apply, potentially increasing the overall cost of the transaction.
Inheritance Tax (IHT) reforms, effective from April 2025
Inheritance Tax is levied on the estate of a deceased person, encompassing property, money, and possessions. The upcoming reforms, effective from 6 April 2025, represent a significant shift in the way that IHT is calculated.
Key changes to be aware of:
- Transition to a residence-based system: The UK will move from a domicile-based to a residence-based IHT system. This means that long-term UK residents will now be subject to IHT on their worldwide assets.
- Modification of reliefs: Business and Agricultural Property Reliefs will be capped at £1 million. Assets exceeding this threshold will be taxed at 20%, half the standard IHT rate. This change aims to ensure fairness but may impact the succession planning of family businesses and farms.
Implications for estate planning
Understanding how these IHT changes affect your estate is crucial.
- Broader taxable estate: With the shift to a residence-based system, UK residents will need to account for overseas assets in their estate planning, potentially increasing their IHT liability.
- Review of reliefs: If your estate includes business or agricultural property, the new caps on reliefs may result in higher IHT charges. Reviewing and possibly restructuring your estate plan can help mitigate these effects.
Strategies to consider
Given these impending changes, several strategies may help manage your tax liabilities:
- Advance planning: If you haven’t already, begin engaging in estate planning as soon as you can. This includes reviewing wills, considering lifetime gifts, and exploring trust arrangements to optimise tax efficiency.
- Professional advice: Consult with financial advisers or tax professionals to understand the specific impact on your situation and to develop a strategy.
- Stay informed: Tax laws and regulations can evolve. Being aware of any further changes will enable you to adjust your plans accordingly.
The upcoming changes to Stamp Duty and Inheritance Tax are poised to affect property transactions and estate planning, particularly if you are considering later life lending or downsizing. If you are unsure of the implications to you, speak to a financial adviser. They will help you to navigate the new rules effectively and make the best decisions for you and your family.
