The Autumn Budget 2024 has introduced major changes to the UK’s Inheritance Tax (IHT) landscape, creating new challenges for estate planning. Key among these changes is the inclusion of pensions in estate valuations for IHT from April 2027, alongside frozen tax-free thresholds and revisions to Agricultural and Business Reliefs (APR and BPR). These developments could significantly increase IHT exposure, prompting advisers and families to rethink their strategies.
Pensions: A Game-Changing Shift
From April 2027, unused pension funds at the time of death will be treated as part of an individual’s estate for IHT purposes. Previously excluded, pensions had served as a powerful tool for intergenerational wealth transfer. This change, combined with frozen IHT thresholds—£325,000 for the nil-rate band and £175,000 for the Residence Nil-Rate Band (RNRB) —means a larger portion of estates will now be subject to the 40% IHT rate.
The inclusion of pensions could potentially push estates into higher tax liabilities, tapering the RNRB, with families who once considered themselves outside the scope of IHT now facing significant tax burden.
Changes to Agricultural and Business Reliefs
Adding to the complexity, the government has announced that BPR and APR will be combined from 6 April 2026, with the introduction of a £1m threshold and a reduced 50% IHT relief thereafter (excluding unquoted shares, including AIM which will only qualify for 50% IHT relief with no threshold).
As a result, Advisers should remain vigilant with a greater importance on Lifetime gifting into Trust and planning on first death.
Trusts: A Strategic Solution
With the inclusion of pensions from 6 April 2027 and a freeze on IHT thresholds until 2030, Trusts become an even more valuable tool for reducing taxable estates.
Drawing and redirecting pension assets to Flexible Reversionary Trusts would protect those assets from social impacts such as divorce, bankruptcy and enable intergenerational tax planning for up to 125 years.
Flexible Reversionary Trusts: A Solution for Surplus Income and Capital
At WAY Trustees Limited, we specialise in Flexible Reversionary Trusts (FRTs) tailored to individual needs.
FRTs offer key benefits for clients with surplus income or excess capital:
- Immediate IHT Exemption for Surplus Income: Excess income from pension drawdown can be placed into FRTs and qualify for immediate IHT exemption under the Gifts from Normal Expenditure rules.
- Managing Excess Capital: Tax-free pension lump sums can be gifted into FRTs, reducing estate values while maintaining flexibility for the Settlor and Beneficiaries.
- Tailored Flexibility: FRTs address surplus income, capital, or a combination, offering flexible planning options for your clients.
Preparing for the New IHT Landscape
The inclusion of pensions, frozen allowances, and changes to APR/BPR demand a proactive approach. Revisiting estate plans, considering lifetime gifting via flexible Trust structures are essential.
WAY Trustees Limited, with over 20 years of experience of managing Flexible Reversionary Trusts, is here to guide you through these changes. Contact us today to safeguard your clients’ wealth and secure their financial legacy.