The Chancellor additionally reduced business and agricultural property relief from April 2026 (Image: Getty)
Many families will be using the time between Christmas and the New Year to sort out their finances, explains Ian Dyall, head of estate planning at wealth management firm Evelyn Partners.
Dyall said his firm had already seen an increase in savers wanting to know how to offset the rise in inheritance tax, or IHT, next year.
He says: “In the October Budget, Chancellor Rachel Reeves announced that defined contribution pension pots will be included in estates’ inheritance tax liabilities from April 2027, and she also froze the nil rate bands for an extra two years, until April 2030.
“Reeves additionally reduced business and agricultural property relief from April 2026. The first £1 million of combined business and agricultural assets can still be passed on tax-free, but IHT will be levied at 20 percent on the rest. A 20 percent rate will also apply to AIM shares.”
Dyall says there are seven things families can do now to protect their wealth from inheritance tax.
READ MORE Inheritance tax expert shares 3 things you can do now to protect your wealth
One – make or check your will(s)
Dyall says: “If you don’t have a Will then making one is often a huge step in establishing financial security and peace of mind for your family – especially if you can get your solicitor to work closely with a good financial planner. This can prevent unnecessary stress and even disputes for the administrators and beneficiaries of an estate and could save them having to pay unnecessary inheritance bills.
“Having a will in place is especially crucial for unmarried couples in long-term relationships – as the intestacy rules could lead to an unwelcome distribution of assets at death – and for blended families where uncertainty and misunderstanding can arise. Where the family home is not jointly owned, that could also create issues at death and couples can consider how their property is owned at the same time as looking at wills.
He also pointed out the £1m business relief 100 per cent band is not transferrable to the surviving spouse, so leaving everything to your spouse could waste the allowance of the first spouse to die.
“Leaving business relief assets up to the £1m band either directly to children, or to a trust that the surviving spouse can benefit from on first death may result in a significant inheritance tax reduction.”
Two – gift or spend
Dyak says: “More estates will find they are likely to incur growing IHT liabilities, whether that is the result of the inclusion of pensions as a taxable asset, or the dilution of reliefs, or just because growth in asset values is dragging them over the nil-rate bands. Their residence nil-rate band could also start to disappear if their estate starts to be valued at more than £2 million.
“One perennial remedy for this is to spend more on yourself and your family or to give away more wealth during lifetime to shrink the estate so that less of it is taxable at death. Many older savers and investors find it difficult to switch from accumulating wealth to spending it or giving it away, so sometimes this can require a bit of a change of outlook.”
Three – get married
Ian says: “Wealth left to a spouse or civil partner is exempt from IHT, and that will apply to pension pots too. So for many people this might only become an IHT ‘problem’ when they are the surviving spouse.
“However, for those who are in a relationship but unmarried – whether co-habiting or not – the issue becomes more pressing. It could well be that many older couples in long-term relationships decide to tie the knot to make this problem go away, for a certain timespan at least.”
Four – couples need to review how their assets are owned and distributed
The changes in the Budget mean that both husband and wife need to ensure that they use their allowances, particularly if they own business or agricultural assets, but even if they have a large pension which will be liable to IHT in a couple of years’ time.
They need to try to keep the surviving spouse’s estate below £2million on second death to preserve the residential nil-rate band, which may mean gifting assets up to the nil-rate band on the first death.
It might also mean trying to avoid bringing other assets into the estate like their own inheritances from parents. It can be tax-efficient to skip a generation and pass these straight on to grandchildren using a deed of variation
The expert said: “Married entrepreneurs must look at how they own their business. A successful married entrepreneur who has a business held solely in their name could be looking at a substantial IHT bill under the new rules as they will only have one lot of £1million APR/BPR. That might mean the business has to be sold in the event of their death to fund the tax bill.”
Five – have a pensions rethink
The Budget rule change means retirees might not necessarily want to be sitting on a big pension pot when they die, as it will add to the value of the estate and could either create or add to an IHT liability.
Under current rules, the pension IHT change could mean that some pots are “double-taxed” if the holder dies at age 75 or older, because then the beneficiary could also be charged income tax at their marginal rate as they withdraw funds from the pension that has already been subject to IHT at 40 per cent
If the beneficiary is an additional rate 45 per cent taxpayer then they will get just 33p in the pound from the passed-on pension – an effective tax rate of 67 per cent. Also, if the addition of pension savings will push the total value of an estate over the £2million mark, then the residence nil rate band will start to disappear and IHT bills will become even more onerous.
So around the age of 75, a retiree could start to draw down more rapidly on their pension pot, rather than use other assets as they might have done under current IHT rules. But the possible IHT saving must be set against the tax paid on the pension withdrawals – especially where the saver is close to a big marginal tax step or paying the 45 per cent additional rate.
“We might see some savers accelerate the withdrawal of their 25 per cent tax-free lump sum, either to spend or even gift it to set the seven-year clock ticking,” adds Dyall.
Another tactic would be to take regular withdrawals from the pot as income, in order to make gifts using the “normal expenditure from income” rule. Such regular gifts could be free of IHT, as long as they meet the rules, which can be finicky, so this is a process best managed with advice.
Six: Insure your IHT liability
For those who are looking at substantial IHT liabilities after pensions are included in estates, taking out whole of life cover can be an efficient way of insuring your inheritance tax liability, so beneficiaries do not have to pay it themselves.
You can take out a life insurance policy for all or part of the estimated IHT bill and crucially, have it written into trust so the eventual payout does not form part of your estate for tax purposes. You pay the monthly premiums and when you die the trustees, your beneficiaries, can use the proceeds to promptly settle the IHT bill.
How can I insure my family against paying inheritance tax?
One insurance provider, Royal London, launched a new form of life insurance product this month.
Protection advisers, who specialise in life insurance, are seeing an increase in the number of families looking to take out the product because it can help pay for some or all of an inheritance tax bill.
Naomi Greatorex, managing director of Health Protection Solutions, has seen a 50 percent increase in families looking at taking out IHT-related life insurance this year, largely because of the expectation a Labour government would have IHT in its sights.
She said: “I expect this to increase even more next year when some of the changes come into force.”
Greatorex said the earlier the life insurance was taken out the cheaper it would be, and that 40 and 50 year olds may be able to pay as little as £60 a month. A 60-year-old could expect to pay more, £81.55 per month, while a 65-year-old would pay £134.52 per month.
“Once you are over 70 it can go up to £234.72 per month or a 75-year-old may pay £420.53 a month.”
There were two ways life insurance policies can be written to cover an IHT bill.
Either a whole of life single life or joint life second death policy, or as a Gift Inter Vivos.
Gift Inter vivos insurance is a seven-year term insurance taken out by wealthy individuals who feel they may not live another seven years and want to use the 7-year rule to give their children or grandchildren cash.
This type of life insurance gets cheaper and if they haven’t died at the end of the seven years then no IHT is due anyway.
This type of insurance is written using trust law so the money paid out will have to be paid into a tax-free or tax-friendly trust. If it is paid into the estate it then becomes taxable so subject to inheritance tax.
Alan Lakey a protection expert and adviser added: “An estate valued at £1.5m would mean a current IHT bill of £200,000. This assumes that each spouse/civil partner has a £325,000 IHT nil rate band plus an additional £175,000 property allowance each.
“Therefore in this instance you would make an assumption of future estate inflation based on their age, likely longevity and how the estate is set up (is it primarily property or is there an investment portfolio?)
“Everybody is allowed to make gifts,” says Lakey. “Tax-free gifts are limited to £3,000 per year. For most people this is insufficient so a gift of say £50,000 is made. If the gifter dies within seven years some or all of the gift is added back into the estate.”
In years 1-3 100 percent becomes taxable, while in year four this goes down to 80 percent, in year five it is 60 percent, and in year seven 20 percent. After seven years the gift is not included for tax purposes.
Lakey urged families to act now, adding: “Most people leave IHT concerns until they are in their 60/70/80s. This means that the cost is not only a lot higher than back in their 40/50s but there is also a high chance that they will no longer be healthy and therefore asked to pay more or, in some cases, be unable to obtain insurance.”
What is inheritance tax
Inheritance tax is only paid when someone has died.
There’s normally no inheritance tax to pay if either:
- They have left less than £325,000
- Or they have left any cash or assets above £325,000 threshold to either your spouse, civil partner, a charity or a community amateur sports club
If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your tax threshold can increase to £500,000.
If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.
