These developments highlight the critical need for proactive and well-structured estate planning to help minimise tax exposure and ensure the smooth transfer of assets to beneficiaries.[1]
Key Budget Changes Impacting IHT
Freezing of IHT Thresholds:
- The nil-rate band (£325,000) and residence nil-rate band (£175,000) have been frozen until 2030. Additionally, the residence nil-rate taper will continue to start at £2million. With inflation, more estates are likely to be drawn into the IHT net.[1]
Caps on Business and Agricultural Property Reliefs:
- Starting from April 2026, inheritance tax relief for business and agricultural assets will be limited to £1million. Amounts exceeding this threshold will be taxed at a reduced rate of 20% instead of the standard inheritance tax rate of 40%. This tax can be paid in interest-free instalments over a 10-year period.[2]
Unused pension funds and death benefits:
- As announced in the Autumn Budget 2024, most unused pension funds and death benefits from a pension will be included in an individual’s estate for Inheritance Tax purposes starting from the 6th of April 2027. Currently the rules are unchanged and pension funds and death benefits from a pension fund are still exempt from IHT. The aim is that under these reforms, pension scheme administrators will be required to report unused pension funds and death benefits to HMRC and will be responsible for paying any associated Inheritance Tax.[3] The Government are still in the technical consultation on the process required to implement these changes. Therefore, we await the finer details of how the announcement may impact our clients.
Planning Strategies to Consider
While these changes present challenges, there are several strategies to help mitigate IHT:
Lifetime Gifting:
- A Potentially Exempt Transfer (PET) is a gift or transfer of unlimited value that has the potential to be exempt from Inheritance Tax (IHT). Common examples of PETs include outright gifts such as cash or transfers into absolute or bare trusts. To qualify for exemption, the individual making the gift must survive for seven years after the transfer. If they do, the PET is fully exempt and will not be considered for IHT. PETs made more than seven years before death are excluded from the IHT calculation entirely. However, if the individual passes away within seven years of making the gift, the PET “fails” and is treated as a Chargeable Transfer (often referred to as a “failed PET”) for IHT purposes. In this case, the value of the gift is included in the estate’s IHT calculation.[4] Additionally, it’s good to make use of your £3,000 ‘gift allowance’ every year, known as the annual exemption. Where an individual can give away assets or cash up to a total of £3,000 in a tax year without it being added to the value of your estate for Inheritance Tax purposes. There are other gifts that can be made IHT free, such as gifts that are worth less than £250 to an individual and regular gifts out of surplus income, which does not affect your standard of living, for example regularly paying into your child’s or grandchildren’s savings account.[9]
Reviewing Pension Drawdown Plans:
- With most pensions to be included in your estate from 6 April 2017, it may be wise to reassess how retirement income is drawn post April 2017. A drawdown pension allows you to withdraw income from your pension pot while keeping the remaining funds invested in the stock market. This provides flexibility, as you can take out as much or as little as needed, with withdrawals taxed as income. Unused funds can currently be passed on to beneficiaries free from Inheritance Tax. The key advantage of drawdown is the control it offers—you can adjust your income, withdraw larger lump sums, or even switch to an annuity later. However, there are risks, including the potential for your pot to run out if withdrawals or market losses deplete it. Additionally, the need for ongoing management and exposure to stock market volatility makes it less predictable than an annuity. This option works best with careful financial planning and advice.[5]
Estate Liquidity:
- Estate liquidity is critical for families with significant business or agricultural assets to ensure there is sufficient cash available to meet potential inheritance tax (IHT) liabilities. Without proper planning, heirs might face the difficult decision of selling key assets—such as family businesses or farmland—to cover tax obligations, which can disrupt long-term family goals or business continuity. Strategies to mitigate this include setting aside liquid reserves, using life insurance policies, or exploring succession planning options like lifetime gifting or restructuring asset ownership.[6]
Insurance Solutions:
- Life insurance can serve as a vital tool in managing inheritance tax (IHT) liabilities, particularly for families aiming to preserve the value of their estates for future generations. Policies designed to cover IHT liabilities, such as whole-of-life insurance, can ensure that beneficiaries receive a payout to settle any IHT bills. This helps to avoid the need to sell family assets or properties to cover tax obligations. By structuring the policy correctly, such as writing it into trust, the proceeds are kept outside of the taxable estate, making them exempt from IHT. This arrangement ensures that beneficiaries receive the full value of the policy without delays caused by probate or tax deductions. Additionally, choosing the right type of life insurance and aligning it with estate planning goals is critical. This type of strategy not only mitigates tax exposure but also provides peace of mind, knowing that loved ones won’t face financial pressures from unexpected IHT tax bills. However, these policies and trusts can be complex, so seeking advice from our Estate Planning team is highly recommended to tailor solutions to individual circumstances.[7] [8]
Expert Insights
Duncan Edwards, our estate planning adviser, emphasises: “The changes announced in the Autumn Budget will undoubtedly require a closer review of Estate Plans. For families with complex estates or those reliant on business or agricultural reliefs, taking action now—whether through gifting, re-evaluating investments, or exploring insurance options—is critical to avoid unexpected burdens on beneficiaries.”
Taking the Next Steps
With the first changes taking effect in April 2026, and further reforms in April 2027, now is the time to revisit your estate plan. Every family’s situation is unique, so tailored advice is essential. Our team are here to guide you through these adjustments and help you make informed decisions to secure your legacy.
