The arrival of the new tax year also means we’re one year closer to the revised Inheritance Tax (IHT) rules coming into effect from April 2027.
These new rules mean that unused pension pots will be included as part of your taxable estate – another reason why Money Marketing reports that more than half of advised investors are more worried about tax than a year ago.
If you’re relying on your pension for estate planning purposes, you might be thinking about how you can prepare for the new rules ahead of time.
Don’t panic, or you could risk harming your wealth more
Pensions have long been utilised as an estate planning tool due to their tax efficiency. A Pensions Age report found that 54% of UK adults consider pensions a “key component” of their IHT strategy.
With new rules removing this tax-efficient avenue, this has caused consternation among those relying on their pension for inheritance purposes – Money Marketing reports that 47% of UK adults have cited tax rules (like IHT and pensions) and allowances as a major source of uncertainty.
Understandably, you might be feeling anxious if the new rules are set to uproot your plans. While you might be feeling uncertain, it’s important that you don’t panic, as knee-jerk reactions could lead to unsuitable decisions that accidentally increase your IHT liability.
Instead, keep calm and remember that there is still plenty of time to act before the new rules come into place. Keep reading to discover various options you can use to pass wealth to the next generation tax-efficiently.
Take advantage of various exemptions, allowances, and reliefs to substantially mitigate your IHT liability
Various exemptions, allowances, and reliefs are available to reduce your estate’s IHT liability.
However, it’s important to determine which best apply to your own financial circumstances before relying on them for your IHT plans.
Nil-rate and residence nil-rate band allowances
Every UK citizen is entitled to the nil rate band allowance, which is £325,000 per individual for the 2027/28 tax year. The value of your estate up to this threshold is free from IHT.
If you pass your main residence to a direct descendant (meaning child, grandchild, or great-grandchild), you can also take advantage of the residence nil-rate band, which is up to £175,000 per person for the 2026/27 tax year.
Combined, these allowances could give your estate £500,000 worth of IHT protection.
Spouse or civil partner exemptions
If you are married or in a civil partnership, your spouse or civil partner will be able to inherit your entire estate without paying any IHT.
This can allow you more time to reduce the value of your combined estates as the process of calculating and paying the tax is deferred until the second death (useful for long-term strategies like lifetime gifting).
What’s more, unused nil-rate bands can be transferred to a spouse or civil partner. This means that your combined estates could receive up to £1 million of IHT protection (any amount over these thresholds will be liable for IHT at the standard rate of 40%).
Business Relief (BR)
If you have a stake in a business, you might be able to claim Business Relief (BR).
Until recently, you could claim 100% IHT relief on assets that qualified for BR, including:
- A business
- Interest in a business
- Shares in an unlisted company.
Now, this is capped at £2.5 million per individual. Any qualifying assets that exceed this amount are subject to IHT at 20%, which is half the standard rate.
However, like the nil-rate bands, BR also benefits from doubling up if you are married or in a civil partnership, offering you potentially up to £5 million in IHT relief for business assets.
Lifetime gifting can help you decrease your estate’s value over time
You can also take advantage of long-term strategies like lifetime gifting to steadily reduce your estate’s IHT liability.
Various gifting allowances let you transfer wealth to your loved ones without an IHT charge, so long as they follow strict gifting rules:
- Gifts to a spouse or civil partner – These transfers are immediately 100% free from IHT.
- Annual exemption – You can give up to £3,000 away to one or multiple people each year.
- Small gift allowance – You can give up to £250 per person per year, but you can’t use it with the annual exemption.
- Wedding gifts – You can give £5,000 to a child, £2,500 to a grandchild, and £1,000 to anyone else for weddings or civil ceremonies each year.
- Gifts from regular income – You can make unlimited gifts from your regular income, provided they don’t reduce your own standard of living and are made regularly.
Any gifts that fall outside the remit of these allowances and exemptions become potentially exempt transfers (PETs). A PET is only free from IHT if it is given seven or more years before the donor’s death.
If not, it may be liable for some IHT, calculated based on a sliding scale known as taper relief – these rules can be complex, so it’s recommended that you seek professional advice when dealing with PETs.
If you start lifetime gifting early, you can substantially reduce your estate’s value by the time it passes on to your beneficiaries, who will be left with a significantly smaller IHT bill to pay.
Transferring your wealth while you are still alive also offers the benefit of witnessing first-hand the positive effect your wealth has on your loved ones’ lives rather than only passing it on after you die.
Get in touch
If you’d like to discover your options to help reduce your estate’s IHT liability ahead of next year’s pension rules, get in touch with a Milsted Langdon financial planner today.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.