Inheritance tax hub

Inheritance tax (IHT) is becoming an important topic for many more clients. This is mainly due to frozen tax thresholds and upcoming changes to pensions from April 2027, which could push more estates into paying IHT. Advisers will need to shift discussions towards planning that helps protect wealth and manage tax efficiently.

Key factors driving IHT changes include:

• Fiscal drag: Tax allowances have not increased for years, while property values and investments have grown. This means more people face IHT simply because their assets are worth more.
• Pension changes from April 2027: Most unused pension pots will be included in the value of an estate. This removes a key planning advantage and may increase some estates’ value suddenly.
• Executor challenges: New rules will create more reporting and payment requirements linked to pensions, often involving several providers and assets during a stressful time.

For advisers, this means IHT planning will become a core part of conversations. It will be important to:

• make sure clients hold enough liquid assets to cover any tax bills without forced sales
• offer holistic advice on organising pensions, investments, and protection strategies
• start tax-efficient planning earlier to protect family wealth and avoid surprises after death.

Overall, advisers will need to take a proactive approach to navigate the increasing complexity and seize planning opportunities across life and pensions.

As an adviser managing your clients’ assets, trusts provide a valuable way to help reduce IHT liabilities. By moving assets out of a client’s estate while maintaining control over how and when beneficiaries access them, trusts can effectively lower the estate’s value for IHT purposes and support smooth wealth transfer across generations.

Trusts can help you structure your clients’ wealth efficiently by offering:

• removal of assets from the estate, subject to the prevailing tax rules
• ongoing control over who benefits and the timing of distributions
• solutions tailored to complex family or business arrangements.

Bear in mind the tax considerations tied to trusts. Most fall under the relevant property regime, meaning they:

• they are liable for 10-yearly IHT charges
• they may incur exit charges when assets are distributed.

In cross-border or more intricate situations, some assets might qualify as excluded property, attracting different tax treatment. Given the complexity of trust legislation, trusts tend to work best when incorporated into a broader inheritance tax plan rather than as standalone tools.

Protection solutions, such as whole-of-life insurance policies written in trust, can provide a tax-efficient lump sum to cover IHT liabilities on death. This helps beneficiaries pay the tax bill without needing to sell valuable assets or disrupt long-term financial plans.

Rather than reducing the IHT owed, protection policies often fund the tax liability. When taken out correctly, these policies pay out on death and, if placed in trust, the proceeds usually sit outside the estate. This provides liquidity to settle IHT bills within the six-month payment window.

How protection works to manage inheritance tax

• A life insurance policy pays out a lump sum when the policyholder dies.
• Placing the policy in trust means the payout typically sits outside the estate for IHT purposes.
• Beneficiaries can use the funds to settle any inheritance tax due quickly and efficiently.

Key adviser uses for protection in inheritance tax planning

• Preserving illiquid assets, such as property or business interests, by avoiding forced sales.
• Giving beneficiaries certainty and access to cash when they need it.
• Supporting estate equalisation to provide a fair share to all beneficiaries.

Important considerations

• Make sure premiums remain affordable over the long term to keep cover in place.
• Correct structuring is vital. Trusts are essential to keep the payout outside the estate.
• Regular reviews help adapt the policy if estate values change over time.

Protection solutions offer advisers a valuable way to prepare clients for inheritance tax bills, reducing the risk to their estate and beneficiaries. By planning ahead, advisers can help clients pass on their wealth smoothly and with less financial strain.

IHT reforms are likely to reshape how clients plan and manage their investments. As advisers, you’ll see more demand for strategies that not only grow wealth but also help clients keep more of it for their loved ones. These changes will push investment planning beyond simple growth targets and into careful tax efficiency and lifetime planning.

Why pensions may need re-evaluating

Pensions have traditionally been a popular tool for reducing the value of an estate subject to IHT. However, recent reforms could change this approach. Clients may start thinking about drawing on pension assets earlier, especially if changes affect how these pots are treated for tax purposes.

This shift means advisers will need to revisit pension strategies with clients. Helping them balance the benefits of keeping money in pensions against accessing funds for income or other goals will become more important. Expect more conversations about timing withdrawals and the potential tax impact of doing so.

Stronger focus on lifetime planning

Inheritance tax reforms highlight the value of planning while clients are still alive. Gifting assets during a client’s lifetime, rather than transferring wealth only after death, can offer tax advantages and greater control over distribution.

• Phased wealth transfer: spreading gifts over years to manage exposure and tax bands.
• Using trusts and other vehicles to protect assets for beneficiaries.
• Planning for long-term care costs alongside estate considerations.

Advisers should be ready to help clients develop structured gifting plans that fit with their wider financial aims and family circumstances.

Rebalancing taxable and non-taxable wrappers

Clients may need to reassess their investment portfolios to balance assets held inside tax-efficient wrappers against those held in more accessible but taxable accounts.

For example:

• increasing holdings in ISAs or other wrappers that shield growth from tax
• using investment accounts with capital gains tax considerations in mind
• considering how different asset types perform inside and outside tax wrappers.

This rebalancing helps manage the trade-off between growth potential and estate exposure, aligning with legacy goals.

New portfolio construction considerations

IHT reforms encourage a closer look at the risks and benefits of portfolio growth versus estate exposure. Clients aiming to leave a legacy may accept different levels of risk or prefer investments that offer steady income without inflating estate value unnecessarily.

Advisers should guide clients in:

• choosing investments that meet both growth and estate preservation objectives
• understanding how asset types affect IHT liability
• sequencing asset withdrawals or reallocation to match legacy planning.

What this means for advisers

Changes to IHT rules mean investment advice will intertwine more deeply with estate planning. Advisers must adopt an end-to-end approach, considering the full financial picture—pensions, investments, gifting, trusts, and legacy aims.

This integrated advice approach will likely lead to:

• greater collaboration between investment and estate planning experts
• more personalised strategies that reflect clients’ lifetime goals and family needs
• a shift from short-term product sales towards long-term financial journeys.

Preparing for the future

IHT reforms are a prompt for advisers to update their approach. Acting now can help clients take advantage of new opportunities and protect their wealth.

By reviewing pension use, focusing on lifetime planning, rebalancing portfolios, and linking investment advice to estate planning, advisers can deliver more value. This will help clients confidently navigate change and feel positive about their financial legacy.

Annuities can help reduce IHT by turning capital into income, which may lower the overall value of an estate over time. They also offer options to support dependants, though some death benefits might still face inheritance tax charges.

Reducing estate value

• Convert capital into a guaranteed income to gradually reduce the estate size.
• Provide income security while managing inheritance tax exposure.

Death benefit options

• Joint life annuities continue to provide income for a surviving spouse.
• Guarantee periods or value protection may pay lump sums or ongoing payments to beneficiaries.

Trade-offs to consider

• Enhanced death benefits typically reduce the initial income received.
• Some payments may still count towards the estate for inheritance tax purposes.
• Understanding these factors helps balance income needs and tax planning.

The adviser’s role in annuity planning

An adviser should evaluate annuities alongside clients’ retirement income needs and legacy wishes. This helps ensure annuity solutions support both immediate finances and longer-term inheritance tax objectives.

IHT on foreign assets depends mainly on the client’s residency and where the assets are located. UK long-term residents may face IHT on all worldwide assets, while non-residents usually pay IHT only on assets based in the UK. Recent rules, however, are expanding this scope.

Residency-based approach

• UK long-term residents can be liable to IHT on their global assets.
• Non-residents typically pay IHT only on UK-situs assets, such as property or investments located in the UK.

Key complexities advisers should consider

• Overseas pensions might still fall within the IHT scope despite being offshore.
• Double taxation risks can arise but are often reduced by tax treaties between countries.
• Rules around excluded property and changes to domicile status add further layers of complexity.

Implications for advisers

Clients with cross-border estates need careful, coordinated advice. Planning early is vital due to the evolving legislation and complex nature of IHT on foreign assets.

From April 2027, most unused pension funds will count as part of a client’s estate for inheritance tax IHT purposes. This change reduces pensions’ role as an inheritance tool and is likely to increase the number of estates liable for IHT, affecting retirement and legacy planning strategies significantly.

What is changing

• Pension death benefits will be included in the estate for IHT calculations.
• Executors will be responsible for reporting and paying any IHT due on pensions.

What remains the same

• The spousal exemption still applies, allowing transfers between spouses without IHT charges.
• Certain benefits, like death-in-service payments, may stay outside the IHT scope.

Planning implications for advisers

• Reassess how pension withdrawals are sequenced to manage overall estate exposure.
• Review nomination forms to align with updated estate planning.
• Explore alternative wealth transfer methods, such as trusts or gifting strategies, to mitigate increased IHT risk.

These new rules require advisers to revisit clients’ retirement and estate plans. By acting early, advisers can help clients adapt to this major shift and protect their wealth more effectively.

The personal representative, usually the executor or administrator, handles IHT. They value the estate, report to HMRC, and pay any tax owed before distributing assets to beneficiaries.

Key responsibilities of personal representatives

• Value all assets in the estate, including property, investments and possessions.
• Submit the estate’s financial information to HMRC.
• Pay inheritance tax, generally within six months of the date of death.

Practical challenges advisers should consider

• Assets might need to be sold to cover the tax liability if cash isn’t available.
• Delays can happen when the estate lacks sufficient liquidity.
• Clear communication with clients about liquidity helps avoid surprises.

Future changes affecting IHT responsibilities

From 2027, personal representatives will also be responsible for pension-related inheritance tax liabilities. Advisers should prepare clients by updating estate planning and documentation accordingly.

Implications for financial advisers

• Advise clients early on the importance of estate liquidity to meet tax payments promptly.
• Encourage comprehensive estate planning to document asset values and tax implications clearly.
• Review pension arrangements with an eye on the upcoming 2027 changes affecting IHT.