Post-Budget IHT Planning: A New Priority for Advisers
With the recent pension reforms announced in the October budget, the landscape of estate and IHT planning has shifted significantly. Previously, pensions served as a valuable tool for enabling tax-free inheritance because any unspent pension-pot could be directed to the ultimate beneficiaries outside of the estate.
This meant that the pension owner could consume other assets during their lifetime, knowing that the pension assets were ringfenced for inheritance. However, Rachel Reeves announced that from April 2027, unspent pensions will become part of the taxable estate and subject to inheritance tax.
In addition to the tax on the pension itself, there is also the risk for some estates that the additional taxable value will push the estate over the Residence Nil Rate Band threshold, meaning that a further potential £175,000 (£350,000 for a married couple) tax free distribution is also jeopardised.
The government is currently consulting on exactly how these pension reforms will come into effect; however it must also be remembered that – at present – where a pension holder was over 75 when they died, their beneficiaries will also pay income tax on the withdrawals at their marginal tax rate. It is yet to be seen whether this income tax on withdrawals will be kept alongside the new IHT on pensions, but if it was, higher rate taxpayers risk up to 45% income tax over and above the inheritance tax costs.
These reforms bring pensions back in line with their original purpose, to fund the retirement of the pension holder, and so they are more likely to be spent rather than passed on because they have, at a stroke, become very inefficient vehicles for generational wealth transfer.
This changes the received wisdom that ISAs should be spent before pension funds as arguably pensions will have the harsher tax treatment on death, and indeed it may be that annuities become much more popular going forwards as they do not contribute to the taxable estate on death. It also means that there is much greater emphasis on structuring and gifting the remainder of the estate effectively while spending the money in any pension fund upfront. For example, even though there have been changes to Business Property Relief in the budget, it is still an effective vehicle for mitigating inheritance tax, as is structured gifting over time.
For financial advisers, this shift creates both an opportunity and a responsibility to support clients in:
- Reassessing estate plans to minimise IHT
- Helping clients explore gifting strategies
- Structuring assets to preserve wealth for the next generation
At Estgro, we’re here to help advisers rise to this challenge with tools to streamline estate planning, connect with beneficiaries, and position themselves as the go-to family wealth adviser.
💬 Curious about the implications of pension reforms for your practice? Let’s talk about how we can help.