There is now less than a year until the proposed rule changes regarding pensions and Inheritance Tax come into effect.
Under the proposals, from 6 April 2027, pensions will no longer be exempt from IHT, ending their historically favourable tax treatment.
The government estimates that these changes will affect around 50,000 estates, which will pay more IHT than they would have previously done.
With just a few months to go before the reforms take effect, now is the time to revisit your estate plan to ensure it is best positioned to accommodate the new rules.
Read on to discover four key steps to take now.
1. Ensure you’ve made full use of your allowances
Making full use of your available allowances is one of the simplest ways to mitigate IHT on your estate. These include your nil-rate bands and spousal exemptions.
In the 2026/27 tax year, the allowances are:
- £325,000 for the standard nil-rate band – This is available for everyone.
- £175,000 for the residence nil-rate band (RNRB) – This is an additional allowance if you leave your main home to your direct descendants. It tapers if your estate exceeds £2 million and is lost if your estate is worth £2.35 million.
- Spousal exemption – This allows your spouse or civil partner to inherit anything you leave them free from IHT. It also means they can inherit any unused IHT allowances.
By making full use of your individual allowances, you can pass on up to £500,000 IHT-free. And when you and your partner transfer your allowances, you can collectively pass on up to £1 million.
So, the first step this year is to make sure you and your partner have made full use of the allowances available in your wills and estate planning.
2. Consider how gifting could help you transfer your pension
Gifting your pension while you’re alive may allow you to pass it on more efficiently, while also supporting your loved ones.
The annual gifting allowance lets you give away up to £3,000 each tax year without it counting towards your estate for IHT purposes. If you didn’t use the allowance in the previous tax year, you can usually carry it forward, allowing you to gift up to £6,000.
You may also be able to make regular gifts out of surplus income from your pension. If the payments are regular and don’t affect your standard of living, they can often fall outside your estate for IHT purposes.
Larger gifts from your pension are typically treated as “potentially exempt transfers” (PETs). This means they may still be included in your estate if you die within seven years of making them, although the amount of tax due may reduce over time under taper relief rules.
Because gifting can affect both your long-term security and your wider estate plan, it’s important to use the strategy carefully.
A financial planner can help you assess how much you can afford to give, structure gifts tax-efficiently, and balance supporting your family today with maintaining enough wealth for your own future needs.
3. Explore putting life insurance in trust
When assets are placed in trust, they usually sit outside your estate for IHT purposes.
So, one way to improve the efficiency of passing on your pension is by using part of it to pay for a life insurance policy written in trust. When you do this, the policy is typically paid out to your beneficiaries free from IHT when you die.
However, it’s also important to consider the risks of this strategy. Life insurance can be expensive, and some policies can also increase in cost over time. If your payments stop, the policy will usually end, meaning there will be no payout.
As such, it’s important to consider how the payments could affect your long-term security and income, especially if you’re using your pension to fund it.
A financial planner can help you decide if this strategy fits with your financial plan. They can project how the costs could affect your income, and if you want to pursue this option, they can work with you to choose a suitable policy.
4. Look into investing in a Business Relief Scheme
Business Relief (BR) can reduce the IHT due on certain qualifying assets by up to 100%, including shares in some unlisted companies.
It’s important to note that 100% relief is subject to a £2.5 million allowance, with any qualifying assets above this threshold typically receiving 50% relief. Any unused allowance can usually be transferred between spouses or civil partners. In addition, the assets must generally be held for at least two years before death to qualify.
So, you may want to explore using your pension withdrawals to invest in BR-qualifying assets that may be passed on more efficiently.
However, BR investments are generally higher risk and can be more volatile than other investments, and their value can go down as well as up.
A financial planner can work with you to determine whether BR fits within your overall estate plan and ensure your portfolio is structured to support both your income needs and your legacy goals.
Get in touch
We can help you assess how the upcoming changes to pensions and IHT could affect your estate plan and then recommend what steps you should take to accommodate them.
To speak to a financial planner, get in touch.
Email us at hello@vwmwealth.com or call us on 0141 229 4004.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, trusts, or will writing.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
