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Following last month’s Budget announcement, several significant updates have been made regarding Inheritance Tax (IHT), which will likely impact how people plan for the future. While the current IHT nil rate bands remain unchanged, an important shift is on the horizon: most inherited pensions will soon be subject to IHT.

The standard IHT nil rate band, currently £325,000, has been frozen since 2009 and will remain so until 5 April 2028. The recent Budget announcement extends this freeze further, to 2030, which means the nil rate band will remain unchanged for over two decades by the time it expires.

Although this freeze keeps things simple in one respect, it poses potential tax implications, particularly as inflation and rising property values mean that more estates are likely to exceed the £325,000 threshold and therefore incur IHT.

One of the most significant changes proposed in this Budget is the decision to subject most inherited pension benefits to IHT, effective April 2027. This marks a major shift in the way pensions are treated for tax purposes and will require careful planning for individuals hoping to pass on their wealth tax-efficiently.

Historically, pensions have been a popular tool for tax-efficient wealth transfer, as pension pots could be passed to beneficiaries without attracting IHT upon the original owner’s death. The new rules will change this, potentially adding a sizeable IHT burden for beneficiaries who inherit pension funds. As of April 2027, the value of most inherited pension benefits will count toward the estate’s taxable value, likely subjecting them to the standard IHT rate of 40% for amounts above the nil rate band.

With these changes on the horizon, many people will be re-evaluating their estate planning strategies. One area likely to see increased focus is lifetime gifting, which enables individuals to pass on wealth to loved ones tax-efficiently while they’re still alive:

1. Reduced IHT on death: By transferring wealth to beneficiaries during your lifetime, you can reduce the overall value of your estate and minimise the IHT burden that will apply upon death. If gifts are made more than seven years before death, they are generally exempt from IHT, providing significant tax savings for larger estates.
2. Use of annual exemptions: Individuals can take advantage of annual exemptions, such as the £3,000 annual gift exemption or small gifts of up to £250 to multiple individuals, to transfer wealth incrementally without incurring immediate IHT.
3. Potential for larger tax-free gifts: Lifetime gifts over the exempted amounts are subject to “taper relief” if the giver lives at least seven years after making the gift, gradually reducing the IHT liability on the gifted amount.

Our highly experienced Private Client Team can assist all aspects of planning for later life. From preparing a Will tailored to your individual circumstances or creating a Power of Attorney, to creating Trusts and planning for future Inheritance Tax liability, we can offer practical solutions to help you prepare for your future.