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Inheritance tax changes: how do they affect you? Wealth planner Nick Coey shares his insights on managing changes to inheritance tax and options for planning ahead
M any people are pondering the recent Budget announcements and how changes to pensions will impact inheritance tax (IHT). Today, if you have a money purchase pension and pass away before spending it, that pension doesn’t form part of your estate for IHT purposes. This makes pensions one of the most tax-efficient ways of passing wealth to the next generation. In fact, we often advise clients to spend other assets first, keeping pensions back to help reduce potential IHT liabilities. From April 2027, the rules will change. Unused pensions will be included in your estate when calculating IHT. For some, this will mean a higher bill on death. For others, it may mean facing IHT for the first time. What should you do now? This change will affect families differently. The best starting point is to review your estate planning and make sure you have the basics in place: •Is your will up to date and does it reflect your wishes? •Calculate your estate value by including your cash, property, investments and valuable assets (such as cars, jewellery and antiques). •Review your gifts and note down any money or assets you’ve given away in the last seven years. •Understand the allowances. Everyone has a nil-rate band of £325,000 (or up to £650,000 for a couple on second death). If your home is passing to direct descendants, such as children or grandchildren, you may benefit from the residence nil-rate band of up to £175,000 each. Combined, this can mean up to £1 million of allowances. These thresholds are frozen until 2030. •Check your pension nomination and ensure it reflects your wishes. While not legally binding, it gives your beneficiaries more choice in how to receive the funds, which can reduce tax exposure. Estate valuations can be complex, so we suggest seeking both legal and financial advice. The way that exemptions, pensions and gifts are treated can make a significant difference to IHT calculations.
NEW RULES From April 2027, unused pensions will be included in your estate when calculating IHT
Planning ahead With allowances frozen and asset values rising, HMRC’s IHT receipts are already increasing. In 2024, a total of £7.5 billion was collected and – when pensions are included from 2027 – that figure will be expected to rise further. If you are concerned about IHT, there are options: •Do nothing and accept tax will be due. •Spend more by using your money for experiences and services, rather than acquiring new assets. •Gift assets either directly or through trusts, though these may only fall outside your estate after seven years. •Invest in Business Relief qualifying assets, which can become exempt after two years (though these are high risk and require advice). •Insure against it with a life insurance policy that can provide funds to cover some or all the IHT bill, if set up correctly in trust.
How we can help Every client’s situation is different. Estate planning is complex, and mistakes can be costly. Our private client solicitors work closely with our in-house independent financial advisers to review your assets, explain your options and put in place a plan that works for you and your family.
Find out more at teeslaw.com or contact the team today on 01223 311141. Visit the Cambridge office at No 3 Journey Campus, Castle Park, Castle Street CB3 0AY
This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Some information quoted was obtained from external sources we consider to be reliable. Tees is a trading name of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered number 211314. Tees Financial Limited is registered in England and Wales. Registered number 4342506.
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