Reassessing strategies to minimise Inheritance Tax liabilities
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 is 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 has 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 is 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 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 do not benefit from the £1m allowance. While these benefits are enticing, BR investments 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 considerable risk tolerance.
Re-evaluating traditional solutions
The urge to maintain pensions as a central pillar of financial planning is understandably strong. However, it has become abundantly clear that the post-2027 estate planning landscape requires a more balanced and multifaceted approach. Although pensions are valuable for retirement income 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.
Are you ready for what’s to come?
The landscape of estate planning is evolving, and timely action is crucial. From understanding the implications of the April 2027 pension changes to exploring tailored alternatives, the choices you make now will determine the legacy you leave behind.
If you’re ready to reconsider your estate planning or wish to explore alternative strategies, we’re here to assist. Contact us today to discuss your specific needs or to learn more about the best approach for your family’s future. Take charge of your estate planning to ensure peace of mind for you and your loved ones.
This information has been prepared using all reasonable care. It is not guaranteed as to its accuracy, and it is published solely for information purposes. It is not to be construed as a solicitation or offer to buy or sell securities and does not in any way constitute investment advice.
Information based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
The value of investments and income from them may go down. You may not get back the original amount invested.
Past performance is not a reliable indicator of future performance.