The role of protection in Inheritance Tax planning

Inheritance tax (IHT) has always been a key consideration in estate planning. However, recent and upcoming changes, particularly to pensions¹, business reliefs², and frozen allowances³, mean that advisers may find that IHT affects a broader range of clients, not just the very wealthy. For many, it is now a pressing issue that calls for proactive planning.

A changing IHT landscape

The fundamentals of IHT remain familiar: estates above the nil-rate band (NRB) pay 40% tax, and allowances remain frozen until at least April 2031^3/4. Over time, this freeze creates fiscal drag, bringing more estates into IHT as asset values increase.

What has changed is how assets previously outside the estate are treated. From April 2026, reforms to Business Property Relief (BPR) and Agricultural Property Relief (APR) will limit the value eligible for full relief.² Then from April 2027, unused pension funds and certain death benefits will count as part of the estate for IHT purposes¹.

These changes will reshape estate assessments for many clients. Pensions, once a cornerstone of tax-efficient legacy planning, will no longer sit comfortably outside IHT calculations. This will increase taxable estates for some and reduce access to allowances such as the residence nil-rate band (RNRB) through tapering.

This means that more clients will face an IHT liability, and often larger than they expect.

Asset rich, cash poor: the liquidity challenge

One of the most practical challenges IHT creates is funding the liability itself, not just its size. Many clients are “asset rich but cash poor.” Their wealth may be tied up in property, pensions, businesses, or investments, which are valuable but not easy or quick to convert into cash.

IHT is usually payable in cash and within a short timeframe after death. This can force families into difficult choices during an emotional period: selling the family home, disposing of business interests, or selling investments when conditions are less than ideal. From April 2027, pensions will add to this challenge by increasing the IHT bill without providing immediate liquidity¹.

Effective estate planning is now not just to reduce tax, but to make sure the right money is available at the right time.

Why gifting isn’t always the answer

Lifetime gifting is still a useful tool, but it isn’t always practical or desirable. Clients may hesitate to give away assets they still need, want to keep control of, or find making irreversible decisions uncomfortable, especially later in life.

From April 2027, pensions present another challenge: they are non-assignable and can't be gifted outright during a client’s lifetime. Strategies like gifting from surplus income or adjusting retirement income plans can reduce pension values but may involve trade-offs such as higher income tax or less financial flexibility in retirement.

For clients who wish to maintain their lifestyle and asset control, gifting alone could fall short.

Protection written in trust as a practical solution

Protection written in trust offers a practical way forward. A life insurance policy placed in trust pays out a lump sum on death that sits outside the estate for IHT, providing immediate liquidity directly to trustees without increasing the taxable estate.

Used alongside broader estate planning, protection can:

• Provide cash to meet IHT liabilities.
• Prevent the forced sale of property, businesses, or investments.
• Preserve client control and access to assets during their lifetime.
• Support broader financial and retirement plans.

Importantly, protection doesn’t require clients to give away assets or restrict their financial freedom.

Choosing the right type of protection

Advisers can match protection types to the nature of the IHT exposure:

Whichever structure advisers recommend, writing the policy in trust is essential to keep proceeds outside the estate and available exactly when needed.

Supporting financial freedom

Estate planning is ultimately about financial freedom, not just tax rules. Clients want the confidence to live well, retain control, and know their families will be supported when they die.

Tax concerns should not dictate decisions or force compromises that undermine these goals. Protection lets clients plan sensibly for IHT without letting “the tax tail wag the dog”.

By funding the tax liability rather than trying to get rid of it entirely, protection preserves flexibility, lifestyle choices and align with long-term goals.

The adviser opportunity

As IHT rules evolve and affect more clients, advisers have a vital role in reshaping conversations. Focus needs to shift beyond pure tax mitigation to include liquidity planning and practical solutions for families.

Protection written in trust is not a cure-all, but it is a powerful and efficient tool that strengthens estate planning. Advisers who use it well can help to make sure that when the IHT bill arrives, the right funds are in the right hands at the right time.

Important information

This information has not been approved for use with customers and is based on Aviva's interpretation of current law andlegislation, and our understanding of HM Revenue & Customs (HMRC) practice as at 6 April 2026. It is provided for general information purposes only and should not be relied upon in place of legal or other professional advice. Both the law and HMRC practice will change from time to time and our interpretation may be subject to challenge by HMRC or other regulatory body. Aviva cannot act as legal adviser for you or your clients. You should always seek appropriate legal or other professional advice.

Sources:

¹GOV.UK, Inheritance Tax: unused pension funds and death benefits, published 26 November 2025.

² GOV.UK, Agricultural property relief and business property relief changes, updated 9 January 2026.

³ GOV.UK, Inheritance Tax - thresholds, published 26 November 2025.

⁴ GOV.UK, How Inheritance Tax works: thresholds, rules and allowances, accessed April 2026.

All content is available under the Open Government Licence v3.0.