Inheritance Tax Uncovered: What You Need to Know

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Don’t Let HMRC Become the Biggest Beneficiary of Your Will

If I told you that you might have an unwritten, unwanted beneficiary of your Will, how would you feel? And if I told you that beneficiary was HMRC?

That’s the reality many families now face. Inheritance tax (IHT) is tightening its grip — and without careful planning, a significant slice of your estate could end up with the taxman instead of your loved ones.

In our last newsletter, we covered pensions. The headline there: from April 2027, unused pension funds on death are expected to count as part of your estate for IHT. This shift sits alongside a wider set of changes that mean more families are likely to be affected in the years ahead.

WHAT’S CHANGING
  • Pensions and IHT: From 2027, most unused pension savings left on death are set to be counted in your estate for IHT. That makes pensions something to plan with, not ignore.
  • Frozen allowances: The £325,000 Nil-Rate Band and £175,000 Residence Nil-Rate Band stay frozen until 2030. With pensions being pulled into the estate — and property and investment values still rising — more families are likely to drift into the IHT net.
  • Business Relief (BR): From April 2026, full relief will be capped at £1 million across Business and Agricultural Property Relief, with 50% relief on any value above that. This won’t just affect farms — many business owners could face higher tax exposure. We’ll explore this in more detail in our next article.
  • Non-dom rules: From April 2025, the system moves towards a residence-based approach. Long-term UK residents may find more of their worldwide assets caught within the UK IHT regime.
WAYS TO REDUCE IHT

Lifetime Gifting
Everyone can give away up to £3,000 each tax year without it counting towards their estate, and any unused allowance can be carried forward for one year. Smaller gifts of up to £250 per person per year are also exempt, but you can’t use this for anyone who’s already received part of your £3,000 exemption in the same year. There’s no limit to the number of people you can give £250 to, as long as each gift goes to a different person.

That said, these allowances only scratch the surface. You can make much larger gifts, though they take seven years to fall completely outside your estate. Larger gifts can also be placed into trusts if you’d like to retain some control — useful if you’re not entirely confident your children wouldn’t put it all on red.

When it comes to gifting, we’ll always start by looking at what’s affordable for you. Using detailed cashflow planning, we can work out how much you need to maintain your lifestyle before building a proper, long-term gifting strategy.

Gifting from surplus income
If you have more income than you need, regular gifts from that surplus can be immediately free of IHT. This includes pension income, which makes it a particularly effective way of moving money out of your estate. With pensions due to form part of your estate from 2027, this is an option well worth exploring — and something we’ve already been building into many of our clients’ plans.

Business Relief investments
Business Relief allows certain investments to qualify for IHT relief after just two years, compared to seven years with gifts. From 2026, the first £1 million will receive full relief and any value above that will attract 50% relief. Despite the cap, BR investments remain an efficient way of reducing IHT and are worth considering as part of a wider estate plan.

Life insurance that pays the bill
One of the most effective ways to deal with an IHT liability is through life insurance. A whole-of-life policy written in trust pays out directly to your beneficiaries, outside of your estate, so the money is there straight away to cover the tax bill. That means your family don’t have to sell property, shares or the business to raise cash. Unlike allowances or reliefs, insurance isn’t subject to long qualification periods — it also isn’t at the mercy of future changes to tax legislation.

HOW WE CAN HELP

Given the changes ahead, it’s more important than ever to keep your estate plan under review. We are constantly monitoring the rules and will continue to work with you to make sure your plan stays effective. Our aim is to position your estate in a way that supports you during your lifetime, while ensuring as much of your wealth as possible passes on to the people you want — not HMRC.

If you have any concerns or would like to speak to us about your specific circumstances, please give us a call.

 

 

 

 

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