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21st January 2025
Latest news Pensions and retirement Financial planning Tax planning

We take a look at what the changes to inheritance tax rules announced in the Autumn Budget 2024 mean and what levers you can pull to ensure your legacy is protected for your loved ones.

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Inheritance tax has traditionally been seen as a tax that only the very wealthy pay, but rising property prices, frozen thresholds and changing pension rules mean more and more people are set to be caught in the 40% IHT net in the years ahead, unless they plan proactively to mitigate. 

IHT in its current form was introduced in 1986 and every year the nil rate band, the threshold at which your estate becomes liable for a 40% IHT charge when you die, has increased to account for inflation. That stopped in 2009 when the nil rate band was frozen, though in 2017 a residence nil rate band was introduced for people who pass their home to a direct descendant.

The chancellor Rachel Reeves revealed in her Autumn Budget that both bands will remain frozen, at £325,000 and £175,000, until 2030. And from 6 April 2027, pension savings and death benefits, previously exempt from inheritance tax, will be included within estates for IHT. Business relief and agricultural relief, meanwhile, will be subject to a combined lifetime limit of £1 million per person from April 2026, with 50% relief on amounts which exceed the allowance.

Even before the changes were announced in the Autumn Budget on 30 October, the IFS was predicting that by 2032-33 one in eight people will have IHT due either on their death or their spouse or civil partner's death. The prediction is yet to be updated to account for the Budget announcements, but it’s safe to assume that more estates than ever will be facing an IHT bill.

Gill PhilpottGill Philpott“It was a surprise and there's been quite a lot of concern. It is without doubt going to bring more people into the IHT net,” says Gill Philpott, Tax and Trust Specialist at Ascot Lloyd. “Not only are people going to have to pay IHT on pensions, but the residence nil rate band they could have benefited from could be restricted, as it reduces by £1 for every £2 that an estate exceeds £2m.

“I think financial advice is going to become more popular as people see their potential tax bills increase, to understand what they can do to protect their legacy. A lot more people will be asking what they can do to manage IHT. It's really about what it means to your children and your grandchildren. Intergenerational planning is going to be increasingly important to more people.”

The government is consulting on the new pension proposals until 22 January 2025, after which it will carry out a further consultation on draft legislation which will implement the proposals later in 2025. This means there could be changes to what has been announced, but in the meantime it’s important to speak with your financial adviser about how the IHT changes could impact you.

There is no one-size-fits-all solution for estate planning – your financial adviser will help you identify the solutions which will most benefit your individual situation and goals – however in this article we identify six of the key reliefs and levers which can be pulled to mitigate an IHT charge.

Gifting

One way to mitigate IHT is giving it away. The full IHT saving will only be achieved if you survive the gift by seven years. Making use of your annual £3,000 gift allowance will mean these gifts are immediately exempt and the seven-year rule does not apply. You can carry forward last year’s unused allowance. Crucially, IHT is never payable on gifts that help with the living costs of a child in full-time education or a relative who is dependent due to age, illness or disability. Another possible gifting exemption is to make regular gifts from income (so long as it doesn’t affect your lifestyle) rules and conditions apply to this particular exemption.

For many years the IHT relief offered by pensions incentivised people to save into them not just for retirement but to protect their legacy and meant a lot of people preserved as much of their pension savings as possible, depleting other assets in their estate that would be liable for IHT. The 2027 changes could mean people gifting earlier in their lives rather than contributing more to pensions, and then being less hesitant to take their pension, including the tax-free lump sum.

paul tucson portraitPaul TusonIt's going to be even more important to utilise the annual gift allowance but also to understand you can gift from normal expenditure as well,” says Paul Tuson, Independent Financial Adviser at Ascot Lloyd. “In light of state pensions and final salary pensions going up, I've got a number of clients who have got so much income coming in that they don't spend. As long as it's regular and consistent it can be gifted without taking up your gift allowance or falling into scope for IHT.”

It's worth noting that exemptions need to be claimed by the executors and HMRC will review the claim for the exemption on death, so it is highly advisable to keep records so the executors can support the claim.

Now is a good time to engage with our financial adviser to discuss your potential inheritance tax position and explore the options available to you, now and going forward, to help to mitigate your IHT exposure.

Trusts

While gifting is the easiest way to pass on assets without triggering any tax charge, it is an unattractive option if you don’t wish to lose access or control over your assets while you are still living. In this scenario, trusts can be an excellent way to mitigate IHT while maintaining control.

When your assets are transferred into a trust, you no longer own them which means they won’t be valued as part of your estate when you die, once the seven years has passed from the date of the gift to the trust. However, trusts come with their own tax regime so advice should be sought.

“Trusts are certainly a useful way to benefit future generations,” says Philpott. “There are lots of ways they can be used. If you are worried about your future care costs and meeting all your expenses in old age, for instance, they can provide a way to reduce the value of your estate and, depending on the type of trust you use, retain an interest in some of those funds.

“Traditionally with IHT planning, letting go of access to the funds they've carefully built up is not something clients always want to do. This is where certain kinds of trusts might come into play, such as discounted gift trusts or reversionary interest trusts. The complexity sometimes puts people off, but people might have more interest because of the changes to the pension rules.”

Business relief

While business relief will only be available in full up to a lifetime limit of £1 million from April 2026 (50% over £1 million), it remains a valuable tool for legacy planning and could well become more popular as pensions fall into scope for IHT. Qualifying shares must have been owned for at least two years at the time of the owner's death for the relief to apply, though a surviving spouse or civil partner can inherit the ownership period their partner accumulated.

To fully qualify for business relief, the shares must be in unquoted companies. There was an exception for AIM-listed shares, however business relief for AIM shares will now reduce to 50% from April 2026, an effective IHT rate of 20%. The £1m allowance does not apply to AIM shares.

The two-year holding requirement for business relief is relaxed when the qualifying asset is replaced by another qualifying asset within five years. The government has not said this rule will change, which could help those who recently purchased AIM shares for IHT relief purposes, however it’s important to note that the consultation on the new legislation is yet to be completed.

“Eighteen months ago, I had a client who moved £700,000 of ISA savings into an AIM portfolio to protect it from IHT,” says Tuson. “Anything that qualifies for business relief is deemed to be high risk, so we had to make sure they had sufficient capital in the bank for emergencies and sufficient income coming in to cope with care fees. By investing into AIM, they knew that after two years it potentially qualified for exemption from inheritance tax. But since the Budget, that client who put £700,000 in AIM has gone from potentially having no IHT bill to £140,000 of IHT.

Philanthropy

Are you aware that a little known relief is triggered when you donate at least 10% of your net estate to a qualifying charity or charities, reducing the IHT rate payable from 40% to just 36%?

Calculating your net estate means subtracting more things from the total value of your estate than you might realise, including your nil rate band, any debts, funeral expenses and other IHT exemptions that might apply such as business relief. The resulting gift to charity required to trigger the relief could be relatively small after all of the qualifying deductions have been made.

Due to a lack of awareness about the reduced rate, some people leave a certain sum to their favourite charity in their will without realising that if they gave just a small amount more, they would have qualified for the 36% IHT rate. In some instances, the reduced IHT rate could even leave your beneficiaries with a higher post-tax inheritance than if you gave nothing to charity.

These calculations can be complicated, particularly when the value of your estate is likely to increase after you write your will, which could mean a gift you originally thought qualified for the reduced IHT rate no longer does. Having a solicitor help draft your will, including using the right wording to ensure a gift value is always at least 10% of your net estate, could prove invaluable.

Life assurance

There will no doubt be a lot of thought put into ways to mitigate IHT in the coming years, but when an IHT bill is inevitable it is important also to put in place measures to ensure it can be paid by the executors of your will to get probate and thereby distribute assets from the estate.

Life insurance is a highly effective way of protecting your family from financial shock should you pass away. So long as you kept up with our payments. Policies and terms vary so, speaking to a financial adviser is essential to ensure you get the policy that will suit your circumstances

A whole-of-life policy can be set up in a trust for your beneficiaries to ensure the payout when you die (or your spouse if they die after you) is outside your estate and can be paid inheritance tax free and accessed quickly by the executors of your will to pay the IHT bill on your estate and avoid any probate delays.

“Protection is a little underrated,” says Philpott. “I know it is not always straightforward to get it put in place. But when someone passes away, to be able to administer the estate and distribute the assets out of the estate, in most cases you've got to get probate. And to get probate, the executors need to pay the IHT somehow. Having a life insurance policy written under trust, so it's not falling into your estate, gives your executors access to the funds to pay an IHT bill.”

Equity release

Equity release is another way of ensuring an IHT bill can be paid or even reduce the value of your estate by releasing funds from your property to gift to your loved ones during your lifetime. Equity release funds are not subject to any taxation because it is a loan, not a form of income.

If you are one of the many homeowners who find themselves asset rich but cash poor in retirement, tapping into your housing wealth could be particularly attractive. Equity release can unlock much-needed income but is also a good way of transferring wealth between generations or putting the money away in a trust so it can later be used by your executors to pay an IHT bill.

With equity release products, you can draw a lump sum or regular sums from the value of your home while continuing to live in it. Lifetime mortgages are loans that don’t need to be paid back until you die or move into care, after which the house is sold to repay the lender. You retain ownership of the house until that point. Any surplus funds from the sale go to your beneficiaries.

If IHT planning is your goal, you can choose a product with an ‘inheritance protection guarantee’ which allows a fixed percentage of the property value to remain on the subsequent house sale.

“I’ve got a number of clients considering equity release,” says Tuson. “My recommendation is that every single client needs to be aware of what the IHT changes are and how they’ll impact them. We'll revisit their needs and objectives and look at strategies. Nothing's off the table. I've been doing this for 35 years now so I always expect change. Don't be surprised, be prepared.”

If you are worried about how the potential changes to inheritance tax rules will impact you and your family, contact your Ascot Lloyd financial adviser or book a free callback.

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Important Information

Past performance is not a guide to future performance and may not be repeated. Investment involves risk.

This communication is for information purposes only and is based on our understanding of current UK tax legislation and HM Revenue and Customs (“HMRC”).  Levels and bases of taxation and reliefs are subject to change and their value to you will depend on your personal circumstances. Nothing in this communication constitutes financial, professional or investment advice or a personal recommendation. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

The FCA does not regulate inheritance tax planning.

The FCA does not regulate wills.

Equity release isnt right for everybody and every home, so it depends on you and your circumstances.

This communication is issued by Capital Professional Limited, trading as Ascot Lloyd.  Ground Floor Reading Bridge House, George Street, Reading, England, RG1 8LS.  Capital Professional Limited is registered in England and Wales (number 07584487) and is authorised and regulated by the Financial Conduct Authority (FRN: 578614).