With all the changes to IHT in the UK, the pressure is on deciding how to avoid being unduly hit by the impact. Faster gifting is part of the mix.

In late April, this publication reported that official data showed that inheritance tax (IHT) receipts from April 2024 to March this year stood at £8.2 billion ($10.9 billion), £800 million more than the same period 12 months before, or a 10.8 per cent increase.

UK public finances are under strain and there will be more pressure on the government to raise taxes on affluent people and the wider population. At the moment, a taxpayer can avoid IHT by gifting wealth to his/her heirs seven years before death. There are fears that the government may end this tax exemption. Also, the scope of IHT has widened, now covering inherited private pensions.

“Proposed changes to inheritance tax have prompted many to consider gifting earlier than planned. As a result, many are likely to pass on lower amounts to their loved ones after they die,” Robbie Hewitt, a wealth planner for Brown Shipley, told WealthBriefing when asked about the next steps. “Together with the acceleration of gifting, incoming tax changes have prompted many to review their pensions.”

“Some are taking out tax-free lump sums for gifting, while others are carefully assessing the tax implications for holding on to pensions, which were previously designated as part of their estate planning,” Hewitt said. 

The treatment of inherited pensions means that when income tax is also deducted from the remaining pot, the effective tax rate on an inherited pension is 67 per cent.

Not so simple
“Previously, funding pensions was something of a no-brainer given the income tax relief and inheritance tax advantages, but with the incoming changes to inheritance tax rules, one of the greatest challenges will be that individuals cannot gift a pension – they will have to take money out of their pension while they are still alive and gift it,” Hewitt said. “Individuals are faced with the dilemma of balancing the tax they would pay when gifting part of their pension pot versus the inheritance tax that would be paid later by family and loved ones, as well as any tax they will pay on the income withdrawn from it. Many don’t have liquid assets that can easily be gifted, as later in life individuals tend to hold more of their wealth in property and pensions.

“For those who are not quite ready or fully comfortable with outright gifting, there is also the option to gift via discounted gift trusts. A discounted gift trust provides a set level of income for the life of the settlor(s), with the value of the gift discounted as a result this entitlement to income,” he said. “The result is that the ‘discount’ value is immediately out of the estate, with the remainder of the gift falling out of the estate after seven years. It is a popular choice as individuals become older and start planning their estate, as they can gift away wealth whilst retaining a right to an income to support their standard of living.”

WealthBriefing asked Hewitt whether insurance – as is advocated some advisors – has a place when it comes to handling the IHT tax bill when a person dies.

“Insurance policies have their place though they don’t tend to serve as a long-term solution for good estate planning. However, as a short-term solution, it can buy individuals time to decide what they want to do. For instance, for someone in their sixties who isn’t ready to make a full estate plan yet, an insurance policy to cover their current inheritance tax liability would allow them more time to consider how best to pass on their wealth so that they ultimately settle on the best solution for them and their intended beneficiaries,” Hewitt said.

Economic and market volatility, aggravated by the US tariff move of 2 April, hasn’t radically changed the pace of requests for advice on such tax and estate planning, Hewitt said. 

“We’ve found clients have become increasingly resilient to market volatility. In the last five years, clients have been through the Covid-19 market crash and the market correction because of the Ukraine war/high inflation, and now the Trump tariffs drawdown. This recent experience of market downturns and subsequent recoveries has strengthened the resolve of invested clients and, as a result, most individuals are not significantly shifting their approach to financial planning due to market volatility,” he said.