Considerations for Estate Planning in Light of New Inheritance Tax Changes

Recent changes announced in the Autumn Budget will have a big impact on Inheritance Tax (IHT) planning, especially when it comes to pensions. Starting from 6 April 2027, most unused pension funds will be included in estates for IHT purposes. This could mean an effective tax rate of up to 67% in some cases, making it more important than ever to plan ahead.

How will pension funds be affected?

Right now, pension funds can be passed down to beneficiaries free of IHT, and if the deceased was under 75, there’s no income tax charge either. However, the new rules mean:

• Unused pension funds will now be subject to IHT, potentially losing 40% to tax.
• If the deceased was 75 or older, beneficiaries could face additional income tax of up to 45%, meaning they might only receive 33% of the pension.

With the nil rate band and residence nil rate band frozen until 5 April 2030, estates worth over £2 million may also lose valuable tax reliefs.

How to adjust your retirement planning?

These changes mean pension strategies should shift from wealth transfer to retirement income. There are two steps to consider:

• Using the pensions first: If you’re drawing income from ISAs and other non-pension assets, you may want to start gifting those assets to beneficiaries and rely more on pension withdrawals.
• Annuities as an option: Buying annuities may become more appealing as they provide a secure income during retirement.

How to reduce your IHT burden?

To navigate these changes, careful planning is essential.

1. Giving lifetime gifts

   You can gift money or assets to family members tax-free if you survive for at least seven years after making the gift. However, more people are facing unexpected tax bills on lifetime gifts, so it’s best to plan early.

2. Gifting property wisely

   If your home is your biggest asset, gifting it to children or grandchildren could help reduce IHT. However, you must not continue living there rent-free - paying full market rent is required to avoid issues.

3. Understanding taper relief

   Many believe the value of a lifetime gift reduces after three years, but taper relief only cuts the tax due, not the gift’s value.

4. Using life insurance effectively

   Life insurance can help cover potential IHT liabilities, but the policy must be held in trust. Otherwise, the payout itself could be taxed.

With these changes coming in 2027, reviewing your estate and retirement plans now can make a big difference. Whether it’s gifting strategies, pension adjustments, or life insurance, smart planning can help reduce IHT and protect your family’s future.

At Hall Morrice, our experienced team can provide personalised advice to help you navigate these changes and optimise your tax strategy. Contact us today to discuss your options.

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Please note: The information provided is for general informational purposes only and does not constitute financial, investment, or legal advice. Always consult with a qualified financial advisor before making any financial decisions.