For many people, a central goal of their financial plan is not only to provide for themselves during their lifetime, but also to ensure they leave enough to support their loved ones after they’re gone.

To achieve this, it’s a good idea to regularly review and update your estate plan, ensuring it remains efficient and well-structured in light of any changes to your circumstances or tax regulations.

In October, Labour chancellor Rachel Reeves delivered her first Budget, introducing several significant reforms to Inheritance Tax (IHT). While the standard rate of IHT remains the same in most cases, these changes carry important implications for your estate planning.

Reviewing your estate plan now could help you navigate these reforms, reduce your IHT exposure, and protect more of your wealth for your loved ones and future beneficiaries.

So, read on to discover what the IHT reforms could mean for you and how you can ensure your legacy is optimised.

The Budget reforms could mean nearly twice as many estates are liable for IHT

The Labour government’s Autumn Budget introduced substantial reforms to IHT, including:

  • Extending the freeze on nil-rate bands until 2030
  • Subjecting pensions to IHT from 2027
  • Adjusting Business and Agricultural Reliefs so that only the first £1 million of combined business and agricultural assets remain IHT-free, while assets exceeding this threshold will face IHT at a reduced rate of 20%.

A report in the Times found that approximately 4% of estates currently pay IHT, but this figure could rise to around 7% by 2030 due to these reforms.

With the nil-rate bands frozen, it’s important to maximise tax efficiency

The nil-rate band is the threshold above which your estate becomes liable for IHT. It has been fixed at £325,000 since 2009 and the chancellor used the Budget to announce that it will remain frozen until 2030.

As property and asset values rise, the frozen nil-rate band means more estates will fall within the scope of IHT and larger portions of already taxable estates will become subject to it.

However, an additional allowance called the “residence nil-rate band” offers up to £175,000 in IHT relief if you leave your primary residence to direct descendants, including children, grandchildren, or stepchildren. When combined with the regular nil-rate band, these allowances enable you to pass on up to £500,000 tax-free.

Moreover, if you’re married or in a civil partnership, the assets you leave to your partner are exempt from IHT, and your partner can inherit any unused portion of your nil-rate bands. This means that you and your partner can potentially pass on up to £1 million in assets before your estate is liable for IHT.

So, in light of the Budget reforms, it’s a good idea to try to maximise these allowances by ensuring your main residence is left to direct descendants and by combining nil-rate bands with your spouse or civil partner. This strategy may help to reduce IHT exposure and preserves more of your wealth for your loved ones and future beneficiaries.

Giving gifts while you’re alive could be tax-efficient, especially given changes to pension rules

One of the key announcements in the Budget was making inherited pensions subject to IHT from 6 April 2027 onwards. This replaces the previous rules that usually meant pensions could usually be inherited IHT-free.

Under the new rules, inherited pensions will be subject to the standard 40% rate of IHT, provided your combined assets exceed the nil-rate bands. So, while making additional pension contributions may have previously been a useful way of mitigating your IHT liability, you may now want to explore alternative ways of ensuring your assets remain tax-efficient.

Giving gifts while you’re alive, for example, can be an effective way of reducing your IHT liability. Not only does it offer more immediate support to your beneficiaries, but it also reduces the total value of your estate.

Each tax year, you have an “annual exemption” that allows you to give gifts up to a certain amount without the value being added to your estate. For the 2024/25 tax year, the annual exemption is £3,000. If you don’t use your full allowance in a single tax year, you can carry over any unused portion to the next year.

If you give a gift worth more than the annual exemption, it may be considered a potentially exempt transfer (PET). If you die within seven years of giving the PET, IHT may apply, but at a reduced rate based on how long you survived, known as “taper relief.” If you survive for seven years, the PET 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 (after cumulation), there can be no relief.

In addition to your annual exemption, there are other types of gifts that are exempt from IHT, including:

  • Gifts to spouses or civil partners.
  • Wedding gifts, with tax breaks ranging between £1,000 and £5,000 depending on your relationship to the recipient.
  • Charitable donations. Gifts made to charity are exempt from IHT, and leaving at least 10% of your net estate to charity usually reduces your IHT rate to 36%.
  • Gifts from income. You may be able to gift from income provided the gifts are regular, made from income (not capital), and do not adversely affect your standard of living.
  • Small gifts of up to £250, with no limit on the number of small gifts you can give, as long as they are not part of a larger gift, and the recipient has not received a gift from you under another exemption or allowance.

By giving gifts gradually while you’re alive, you can help reduce the size of your estate when you pass away and potentially lower the IHT burden on your beneficiaries.

Assets held in trusts will usually still be exempt from IHT

Business Property Relief and Agricultural Property Relief were previously commonly used to reduce an estate’s IHT liability, but under the new reforms, they are no longer as efficient. However, there are still other strategies available to help manage and preserve your wealth.

Transferring assets into a trust is one such approach. Once assets are placed in trust, they are generally no longer considered part of your estate for IHT purposes, provided the transfer meets specific conditions. However, if you die within seven years of establishing the trust, the assets may still be subject to IHT with taper relief.

There are various types of trusts, each with distinct rules, management costs, and tax implications. So, given the complexity of trusts and their varying degrees of efficiency, it’s a good idea to consult a financial planner before establishing one.

They can help you determine the most appropriate trust to achieve your goals, balancing tax efficiency with the needs of your beneficiaries.

And remember that the Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.

Get in touch

A financial planner can assist you in creating a tax-efficient estate plan, ensuring that your beneficiaries are well-supported long after you’re gone.

To speak to a financial planner, get in touch.

Email info@perennialwealth.co.uk or call 0117 959 6499.

Risk warnings

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

This article is for information 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.

Approved by Best Practice IFA Group on 05/12/2024