Navigating the rise in Inheritance Tax liabilities

When Rachel Reeves delivered her first Autumn Budget in October 2024, she announced changes to the Inheritance Tax (IHT) treatment of pensions.  

While the chancellor’s plans aren’t due to come into force until April 2027, they could have significant implications for your estate planning and IHT mitigation strategies. With this in mind, it’s never too early to revisit your legacy planning, and there is plenty that can be done now to lessen the impact of the proposed changes. 

Keep reading for a look at just three simple ways you could amend your plans ahead of 2027. 

The Inheritance Tax treatment of pensions is changing 

Currently, unused pension funds and death benefits payable from pensions fall outside of your estate for IHT calculation purposes. Under these rules, you might’ve planned to leave one of your pension pots untouched, to pay for potential later-life care, say, knowing that it could be passed on IHT-free if care wasn’t needed.  

Or you might have planned to use non-pension wealth to fund your retirement, safe in the knowledge that your pensions were IHT-sheltered. 

Rachel Reeves used her Autumn Budget announcement to refer to the current rules as a pension “loophole” that she intended to close. 

From 2027, pensions will be brought into the IHT net, so revisiting your estate planning now is essential.  

3 ways to mitigate Inheritance Tax pension changes ahead of April 2027 

1. Using life assurance policies set up in trusts 

Where the IHT bill you leave behind will be potentially large, you might opt to write an insurance policy (or several policies) to cover the liability. The sum assured can then be used to cover the IHT, meaning that your loved ones won’t need to sell assets to cover the debt. 

To help ensure that the life insurance payout doesn’t form part of the deceased’s estate, it can be written in trust to a beneficiary, effectively ringfencing it. The insurance payout is received by the trust’s beneficiaries, who can use the money for its intended purpose – to pay the IHT bill. 

Paying directly to beneficiaries also removes the need for probate and can speed up the process of receiving funds, reducing stress. 

Setting up a trust now allows you to decide who you want your beneficiaries to be, but the process can be complex, so be sure to speak to us first. 

      2. Shifting beneficiaries ahead of this deadline 

In light of the imminent rule changes, it’s also important to revisit your current pension beneficiaries.  

Pension beneficiaries are named using an “expression of wish” form with your pension provider rather than using your will.  

You might want to change the beneficiary to your children ahead of the rule changes so that they can receive the proceeds IHT-free should you die before April 2027. As the date of the new rules nears, you could then shift this back to your spouse or civil partner. This allows them to inherit using the spousal exemption and so there would be no IHT to pay. 

Again, these changes and the timing of them could prove complex. So, it’s always best to seek advice before you make changes to pensions that could have long-reaching consequences.  

     3. Using the annual gift exemption and gifts from regular income exemption to pay into a pension for a child or grandchild 

Gifting during your lifetime – or “giving while living” – helps to lower the value of your estate for IHT purposes. It also means you’ll be around to see the difference your money makes. 

You could make use of gifts to provide the funds for your beneficiaries to contribute to their own pensions. This strategy offers immediate IHT relief for you as the donor, and tax relief for the recipient – at 20% if they are a minor – providing a win-win. 

Similarly, the annual exemption allows you to gift up to £3,000 (2025/26 tax year) with no IHT to pay. This exemption applies to you individually and can be carried over for up to a year. You and your partner could donate £12,000 this tax year as a couple if neither of you used your exemption in 2024/25. 

You can also make regular gifts using the “gifts out of surplus income” exemption. This allows you to make regular gifts from your income, as long as you can prove that: 

• The gift is regular and forms part of your “normal expenditure” 

• Making the gift doesn’t diminish your standard of living 

• The gift comes from income (such as your salary or pension). 

Regular gifts might include private healthcare premiums, school fees, or pension contributions on behalf of a dependant. 

Get in touch 

For expert advice on inheritance tax and strategies to mitigate your potential IHT liability before 2027, reach out to our Foster Denovo team. You can email us at advise-me@fosterdonovo.com or call 0330 332 7866 for more information. 

Please note 

This article is for general information only and does not constitute advice. The information is aimed at retail clients only. 

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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. 

This article is for general information only and does not constitute advice. The information is aimed at retail clients only. 

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. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.  

The Financial Conduct Authority does not regulate school fees planning. 

The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, Lasting Powers of Attorney, or will writing.