Financial planning isn’t just about securing your own needs during your lifetime, it’s also about creating a legacy for your loved ones, ensuring they are supported when you’re gone.
While this may sound simple, it’s important that you have a well-structured estate plan that you regularly review to reflect changes in your personal circumstances as well as tax laws. That way you can ensure your estate is optimised, efficient, and reflects your wishes.
In the recent Autumn Budget, chancellor Rachel Reeves announced significant reforms to Inheritance Tax (IHT) and the new measures could have a notable impact on your estate planning strategies.
So, read on to discover the key IHT reforms introduced in the Budget and how to ensure your estate plan is optimised in response.
The Autumn Budget included several reforms to Inheritance Tax
The Labour government’s Autumn Budget included several reforms to IHT, including:
- Extending the freeze on nil-rate bands from 2028 until 2030
- Applying IHT to pensions starting in April 2027, though this remains under review
- Modifying Business and Agricultural Reliefs so that only the first £1 million of combined business and agricultural assets remain exempt from IHT, with amounts exceeding this limit taxed at a reduced IHT rate of 20%.
While the standard IHT rate of 40% remains unchanged in most cases, the reforms will likely increase the number of estates subject to IHT and raise the tax burden on those already liable.
Indeed, the Times Money Mentor reports that around 4% of estates currently pay IHT, but it estimates that this could rise to around 7% by 2030 due to the recent reforms. Meanwhile, the BBC reports that the new rules will raise an additional £2 billion a year.
Leaving assets to your partner and direct descendants could help to optimise your efficiency
One of the key IHT reforms in the Budget was the decision to extend the freeze on the nil-rate band – the threshold above which your estate becomes liable for IHT – until 2030. By then, this threshold will have remained unchanged for 21 years in total.
Freezing the nil-rate band ensures that more estates will become liable for IHT, as rising property and asset values push more over the threshold.
However, there is an additional IHT allowance called the “residence nil-rate band” which provides you with up to £175,000 in further relief if you leave your primary residence to direct descendants, such as children, grandchildren, or stepchildren.
When combined, the standard nil-rate band and the residence nil-rate band allow you to pass on up to £500,000 to your beneficiaries tax-free.
Furthermore, if you are married or in a civil partnership, the assets you leave to your partner are exempt from IHT, and they can inherit any unused portion of your nil-rate bands. This means you and your partner could potentially pass on up to £1 million in assets before your collective estate becomes liable for IHT.
In light of the Budget reforms, you may want to consider revisiting your estate plan to ensure you maximise these allowances.
The changes to pensions may prompt you to consider more efficient inheritance strategies, such as gifting
Another notable reform introduced in the Budget was that, from 6 April 2027, inherited pensions are proposed to become subject to IHT, if your total assets exceed the nil-rate bands. This represents a significant change from the previous rules, where pensions can generally be passed on IHT-free.
Given that many pensions exceed the nil-rate band on their own, exploring alternative strategies to maintain tax efficiency for your assets may now be more important than ever.
One such option is to give gifts during your lifetime. Not only does gifting provide more immediate support to your beneficiaries, but it also reduces the value of your estate, helping to lower a future IHT bill.
Typically, assets given as gifts are not liable for IHT. However, if you pass away within seven years of making a gift worth more than the annual exemption – £3,000 for the 2024/25 tax year – it may still be subject to IHT, though taper relief could reduce the tax liability depending on how long you survived after giving the gift.
If you survive for seven years, the gift usually falls outside your estate for IHT purposes. Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band, there can be no relief.
By gifting gradually over time, you can help reduce the size of your estate and potentially lower the IHT burden on your beneficiaries.
Placing assets in trusts can help mitigate Inheritance Tax
Transferring assets into trusts can be an effective way to mitigate IHT, as these assets are often no longer considered part of your estate for tax purposes, though the rules can vary.
This strategy can help preserve more of your wealth for your beneficiaries while reducing the value of your estate.
However, it’s a good idea to speak with a financial planner before establishing a trust as, once you transfer the assets, the decision is typically irrevocable, and the specific terms of the trust will determine how the assets are managed and distributed.
A financial planner can guide you in selecting the most appropriate type of trust for your circumstances, balancing efficiency with the needs and goals of your beneficiaries.
They can also ensure your trust strategy aligns with your broader estate plan, providing peace of mind that your legacy is secure.
Get in touch
A financial planner can help you design a comprehensive estate plan, optimised in light of the latest Budget reforms, ensuring your assets are managed efficiently and your legacy is protected.
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 retail clients only.
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.
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. Past performance is not a reliable indicator of future performance.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, Lasting Powers of Attorney, or will writing.
