Reassessing strategies to minimise inheritance tax liabilities

What crucial transformation is poised to reshape estate planning?

Estate planning has always been pivotal in managing how wealth is passed on, but changes to pension rules from 6 April 2027 will reshape the landscape. Historically, pensions have served as both a source of retirement income and a tax efficient tool for intergenerational wealth transfer.

However, as pensions will, from 2027, form part of the taxable estate upon death, some individuals may need to reassess their strategies to minimise Inheritance Tax (IHT) liabilities. The era of relying on tax advantages to preserve pensions as the last untouchable asset in decumulation may be nearing its end. Instead, a reimagined approach to wealth building and distribution will be necessary.

Why April 2027 is a game changer for estate planning

From 6 April 2027, the inclusion of pensions in the IHT calculation signifies a significant turning point. Until now, it’s been common practice to access other assets first, leaving pensions untouched to take advantage of an exemption from IHT.

This has incentivised families to maximise the value of their pensions across generations; however, with the Autumn 2024 Budget announcement introducing this change, it’s clear that traditional strategies are no longer sufficient.

Passing wealth to future generations

While those in the decumulation phase reconsider how to draw down their assets, the impact is equally significant for individuals in accumulation phases. For people in their accumulation years (30s to 50s), during which the focus is on building wealth for retirement, pensions must now also be assessed within the broader context of estate planning.

While pensions still provide immediate tax relief on contributions and secure long-term retirement income, their implications for IHT upon death in certain situations may make them less attractive for passing wealth to future generations.

Diversification: the emerging strategy

Given the changing tax priorities, diversification beyond pensions becomes an essential strategy. Individual Savings Accounts (ISAs), which offer tax-efficient growth and income, are one example. ISAs provide incredible flexibility, allowing individuals to access funds at any time without penalty; however, post-April 2027, ISAs will remain part of the taxable estate for IHT purposes, just like pensions.

For those looking to break free from traditional estate planning tools, Business Relief (BR)-qualifying investments can offer appealing alternatives. Investments in private trading businesses or certain AIM-listed companies qualify for significant IHT relief after two years, helping to avoid or reduce tax charges.

Considerable risk tolerance strategies

With the introduction of a £1m Individual Business Relief Allowance in April 2026, unlisted investments or agricultural property gain an IHT-free cap, while investments exceeding this figure receive 50% relief.

Qualifying AIM-listed company shares also attract 50% IHT relief but don’t benefit from the £1m allowance. While these benefits are enticing, BR investments can carry high risks. Their value can fluctuate, and any tax relief depends on the invested businesses maintaining their status as qualifying assets. This makes such strategies suitable only for those with appropriate risk tolerance.

Re-evaluating traditional solutions

The urge to maintain pensions as a central pillar of financial planning is understandably strong; however, it’s become abundantly clear that the post 2027 estate planning landscape requires a more balanced and multifaceted approach. Although pensions remain extremely valuable for retirement funding due to upfront tax savings, many innovative financial tools and investment vehicles are likely to be considered to develop flexible, efficient strategies that also protect long-term generational wealth.

For families with larger estates, combining approaches such as BR investments with various other strategies could unlock more nuanced opportunities. The earlier you explore these options, with our assistance, the better the potential you will have to minimise your tax burdens and maximise your family’s inheritance.

DISCLAIMER: 

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULDN’T BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE. ALTERNATIVE INVESTMENTS AND BUSINESS RELIEF (BR)-QUALIFYING INVESTMENTS INVEST IN ASSETS THAT ARE HIGH RISK AND CAN BE DIFFICULT TO SELL. THE VALUE OF THE INVESTMENT AND THE INCOME FROM IT CAN FALL AS WELL AS RISE, AND INVESTORS MAY NOT GET BACK WHAT THEY ORIGINALLY INVESTED, EVEN TAKING INTO ACCOUNT THE TAX BENEFITS.