Assuming policy does not change in the interim, the shape of UK inheritance tax will change from the start of April 2027.

We carry the following article on UK inheritance tax (IHT) planning from Caroline Foulger, a partner of Hunters Law. (More on the author below.) Several changes, some of them controversial, are due to take effect from April 2027. The editors are pleased to share these views; the usual editorial disclaimers about views of guest writers apply. To comment, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

Inheritance Tax planning is becoming increasingly complex due to upcoming changes, including the inclusion of unused pension funds into the scope of IHT from April 2027 and the freezing of allowances until 2030. These changes will widen the net of estates affected by IHT, including average families, making early and comprehensive planning essential.

Since 2007, IHT has seen the introduction of the transferable nil rate band, the residence nil rate band in 2017 and the freezing of the nil rate band threshold at £325,000 ($439,708) in 2009. Ten years on, another complication to IHT is on the horizon. From April 2027, most unused pension funds will be brought into the scope of IHT on death. Although pensions were never intended to be an IHT mitigation measure, for some they have become part of the IHT planning tool kit.

Currently, 4.6 per cent of UK deaths result in estates paying IHT. This will rise with potentially 6 per cent of estates paying IHT by 2030 due to a combination of frozen IHT thresholds and the inclusion of unused pension pots, increasing tax revenue by an estimated £1.7 billion annually. On average, estates that already pay IHT will be looking at paying around £40,000 more in this tax by 2030. 

Whilst 4.6 per cent of deaths being subject to payment of IHT may seem like a low proportion overall, of those estates 80 per cent were worth £1 million or less. According to the Office for National Statistics Wealth and Assets Survey 2016-2020, the average total wealth (including pensions) for those aged 55 to 64 was £575,000 to £75,000 above many IHT thresholds. Yet, most people at this level do not view themselves as wealthy.

Inheritance tax is now going to impact the financially average family. However, the options for planning are very limited for those whose wealth is primarily in either the house they live in or the pension they have contributed to for security in old age. Families must now consider new ways of mitigating these impending changes. Tax planning strategies once set aside in favour of pensions may soon gain renewed importance.

With average life expectancy around 20 years post-retirement, early planning is possible. Tax planning typically combines many strategies rather than relying on a single solution, which is why starting as early as possible is important. The earlier IHT is considered the easier it is to plan for.

Using the annual exempt amount and small gifts exemption each year, as well as regularly gifting from surplus income can be a significant relief from IHT. Gift and loan trusts may also become a future alternative to pension contributions. The loan remains part of the estate and can typically be drawn at 5 per cent per year for 20 years. Any outstanding loan at death is included in the estate, but investment growth is exempt from inheritance tax.

These measures assist in preventing the 'problem' from growing ever larger.

Life insurance may also become a more prominent tool for mitigating IHT for those yet to retire, especially as pension-based planning becomes less effective. It may also be considered for those who make gifts and want to make provision to pay the IHT due, in the event that they do not survive the required seven years for the gift to be outside the scope of IHT.

Use of nil rate band discretionary trusts and capturing residence nil rate band on first death may regain importance for optimising IHT outcomes for married or civil partnership couples, with valuation discounts for joint ownership of assets on second death being incorporated into that structure. It may also be prudent to use the residence nil rate band upon the first death, if this allowance is no longer available at the time of the surviving spouse/civil partners' death.

With the business property nil rate band not being transferable under the new legislation, family-owned businesses may need to revisit ownership structures to fully utilise allowances for each member of a couple. A discretionary trust on first death may once again be a practical option.

Whilst IHT planning will become more difficult for many families because of the changes, one consideration will remain the same as ever. That is ensuring that the lifestyle of the person undertaking the planning is as they want it to be in the future and is not impacted by financial resources in a way they are not comfortable with. Potential future care needs and the way that care is provided and funded must be factored into any IHT planning. 

For a lot of people, the recent pension changes have become a catalyst for discussions about IHT. Hopefully, it also opens the door to earlier and wider discussions about estate planning for more families, not just those who consider themselves "wealthy." The outcome of which will hopefully be a better understanding of the needs and views of the whole family and a plan that has time to develop and be flexible to changing circumstances and needs in the future.

About the author
Caroline Foulger specialises in estate planning and advises on wills, trusts, inheritance tax and capital gains tax, as well as lasting powers of attorney. She also has experience in estate and trust administration including as a professional executor and trustee.