Pension & inheritance Tax changes - don't get caught out

Every individual currently has an IHT nil-rate allowance of £325,000, and anything above that threshold is normally taxed at 40%. There is no inheritance tax charged upon transfers on death between married couples or civil partners so a couple can potentially benefit from £650,000 of joint exemptions. On top of the nil rate allowance, homeowners with direct descendants can benefit from the main residence nil rate allowance. This allowance is £175,000 per individual at present, frozen until April 2030 on estates worth less than £2 million. Once the value of the estate exceeds £2 million, the allowance tapers in the same way the personal allowance tapers for income tax.

At Best Advice Wealth Management, we have always supported our clients in providing tailored, expert advice to include Estate & Inheritance Tax Planning. However, bringing pensions into the IHT net will fundamentally change the way in which pensions are used. Due to of the impact of the forthcoming changes, we recognise that a different approach and a change of mindset is needed.

So, what can be done?

There are a number of solutions and strategies to consider for those with pensions and potential future IHT liabilities, including:

• Consolidation of personal pensions into one plan to reduce the administrative burden.
• Start taking or increasing pension income to reduce the pension pot value.
• Taking the tax-free Pension Commencement Lump Sum (PCLS) to reduce the pension pot value.
• Gifting to loved ones to reduce the pension pot value, mindful that gifts are subject to the seven-year exemption rule.
• The use of trusts to offer structure and control to beneficiaries. Again, these are usually subject to the seven-year exemption rule.
• Using IHT exemptions, such as ‘gifts out of normal income’ to pass on wealth and move it outside the estate (subject to HMRC rules). It is important to note that gifting from normal income needs to be carefully documented, as this will be tested by HMRC.
• Re-wrapping pension investments into alternative tax-efficient vehicles to reduce the value of the estate liable to IHT, e.g. onshore bonds in conjunction with an appropriate trust arrangement.
• Buying an annuity. This can move pension money outside an estate if structured correctly.
• Setting up a Whole of Life policy written in trust to cover an IHT liability.
• Business Relief investments – a two-year IHT solution where capital remains with the client. Provided qualifying shares have been held for at least two years, and are held at death, the estate can claim 100% relief on the first £2.5 million invested (and 50% thereafter), or 50% relief for AIM-listed shares.

The changes that will come into effect from April 2027 have significantly altered the IHT landscape and could lead to large, unwelcome tax bills for on clients’ estates and for their beneficiaries to deal with if no action is taken. Estate and IHT planning is an increasingly complex area which requires a tailored approach to suit individual circumstances, including consideration of the transfer of valuable inter-spousal allowances which are important to understand. Planning ahead early is essential to put appropriate arrangements in place beforehand to avoid getting caught out.

* Source: OBR, May 2025