In the October Budget, UK 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.

The chancellor additionally reduced business and agricultural property relief from April 2026. The first £1m of combined business and agricultural assets can still be passed on tax-free, but IHT will be levied at 20 per cent on the rest. A 20 per cent rate will also apply to AIM shares.

Ian Dyall, head of estate planning at wealth management firm Evelyn Partners, said: ‘Estate planning is about a lot more than just inheritance tax: it’s a peace-of-mind strategy to help families pass on wealth in the best way, one that meets as many of their needs and objectives as possible.

‘But it is true that more families will be drawn into the web of inheritance tax in the coming years, and some of those will need to start planning now if they want to mitigate the effects.

‘The IHT rule changes could really undermine many families’ current plans for transfer of wealth, leaving them exposed to quite significant tax bills. So as we head into 2025, there’s an important opportunity for many households to look at their estate planning, not just through a tax lens but also thinking about what they want to do with their assets and what will end up being best for the family’s future.’

Make or check Will(s)

Dyall said: ‘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 Wills 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.

‘Even where Wills are in place, and especially if they were made some time ago, make sure that they still do what you want them to, and that new tax rules do not require a rethink.

‘To take one example, after the changes to business relief and agricultural property relief in the Budget, for many families with businesses or farms the traditional mirror Wills for married couples – where the couple leaves everything to one another and then to their children – might no longer be the best option to maximise the use of available IHT reliefs.

‘The £1m business relief 100% 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 BR 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.

‘It’s also a good time to reflect on articulating your wishes at a time of lost capacity and possibly arrange lasting power of attorney. You can register an LPA at any time and nominate one or more trusted persons, but you do not have to grant it until the need arises.’

Gift or spend

Dyall said: ‘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 £2million.

‘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.

‘Then the big question is usually, are you happy to lose control of the funds that you’re giving away? Both in the sense of whether it leaves you with sufficient funds to live out the rest of your life the way you want to, which is where a financial planner’s forecasts can come in very useful. And also of whether you’re happy that your relatives will use your generous gifts in a way that you’d prefer.

‘Trusts put in place with expert advice can be invaluable because this is a way to retain some control over assets while still gifting them and setting the “seven-year clock” ticking. Families must also pay heed to the gifting rules which are not straightforward.

‘It’s important not to make drastic decisions off the back of the Budget announcements. Now is probably the time to think about a longer-term gifting plan rather than making ad hoc handouts, ideally with the assistance of professional advice.’

Get married?

Dyall said: ‘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.

‘Anyone who is married should check their pension death benefit nomination, as after this rule change it will be best for most couples’ IHT purposes to stipulate that the pension is paid in total to your spouse when you die, rather than any portion left to children or other family members.’

Couples: review how assets are owned and distributed

Dyall said: ‘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.

‘Similarly, 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.

‘So they might seek to mitigate their future IHT liability by moving the business to shared ownership with their spouse. Their Wills might also need to be revised to make a gift on first death either to children or to trust rather than to the spouse.’

A pensions rethink

Dyall said: ‘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.

‘Moreover, 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%.

‘If the beneficiary is an additional rate 45% taxpayer then they will get just 33p in the pound from the passed-on pension – an effective tax rate of 67%. 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% additional rate. We might see some savers accelerate the withdrawal of their 25% tax-free lump sum, either to spend or even gift it to set the seven-year clock ticking.

‘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.

However, Dyall warns: ‘If you are trying to use the excess income exemption, what you can’t do is take all your tax-free cash, stick it in a bank account and gift it gradually from there, as then it will be seen as a gift from capital and not from income.’

Insure IHT liability

Dyall said:  ‘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.

‘If you are married or in a civil partnership, then the best option is a “joint life, second death” policy. This means that both of your lives are insured but the policy will only pay out to your beneficiaries on the second death. The first death does not need to be insured as the surviving spouse inherits assets tax-free.

‘This can also have the added benefit of saving executors some potential stress as it will provide accessible funds to settle the IHT liability with HMRC, which must be done before probate is granted.

‘Those wishing to draw down more heavily on their pension pots in light of the impending IHT rule change could use withdrawals to fund such a policy, as they can be expensive.’

Last year UK entrepreneurs made £11.8bn by selling their businesses, and that was despite economic challenges, compared with previous years where it’s been more than 60% higher, releasing £29.1bn. Once a typical entrepreneur has built a successful business, they may sell part or all of the company to focus on other opportunities and this realised cash is in the bank – how then do they manage their wealth?

Often, the issue is approached as a family household, with two parents usually in their 50s or early 60s and children perhaps in their 20s. The two most common objectives for them are to protect capital while ensuring multi-generational legacy, and for the entrepreneur to retain control over how that objective is achieved.

Seven-year gift as a last resort?

Despite these clear objectives, many families are under the impression that gifting a sum at this stage – when they feel likely to live out the requisite seven years for the financial gift to be Inheritance Tax-free – is the smartest option.

This could be riddled with potential drawbacks though; from inflation risk to loss of control over the ‘gift’ sum when a child marries or divorces, to sibling squabbles when an older child invests in property and reaps asset appreciation, but a younger sibling feels disadvantaged when property prices have moved ahead of their ‘gift’ sum.

In fact, gifting a lump sum may not achieve either key objective of retaining control or creating legacy wealth. Sometimes, it can mean the entrepreneur has diminished the capital sum through gifting to an extent that, calculating for the rest of their life, they don’t have enough money left to live as they wish.

Family Investment Companies (FICs)

There are alternatives for those with, say, £2m or above to invest: Family Investment Companies (FICs). These are a company wrapper, which entrepreneurs are familiar and comfortable with, they provide a flexible and tax-efficient vehicle whereby different share classes can be allocated to different beneficiaries, and control retained by one share class (held by the entrepreneur). Put simply, it sets the ground rules for a shared understanding of how the wealth will be managed.

Within an FIC structure, corporation tax is payable on its income and capital gains, however:

• Dividends received by the company are tax-free in most cases.
• Through careful structuring, there is the potential that an increase in asset values can be outside the individuals’ estates for IHT purposes.
• Funds can be released from the FIC through dividend and salary payments to shareholders to make use of their available personal allowances and basic rate bands.
• FIC loans are a good way of freeing capital to shareholders without requiring the seven-year IHT rule. investment management fees – paid based on a percentage of assets basis – are tax-deductible for FICs, which they are not for individuals.

FICs have become increasingly popular since 2006 regulations made trusts less attractive. HMRC, having stress tested FICs, and confirmed they have not been used for widespread tax avoidance, effectively giving these structures the all-clear for mitigation of IHT through multi-generational wealth planning.

In terms of multi-generational wealth, it’s notable that trusts have a ‘lifespan’ of 125 years whereas the FIC structure can last in perpetuity. Indeed, we have come across FICs that have been multigenerational since the early 1900’s.

Capital preservation beats risk appetite

While entrepreneurs are renowned for a higher risk appetite, in our experience once the business is sold this appetite is satiated; the focus switches to capital preservation and income-generation. Entrepreneurs tend to keep higher-risk private equity investments separate. All FICs we manage are invested in a diversified array of asset classes and geographies in line with the clients’ objectives.

Money can be a great enabler, but, if carelessly handled, can have a detrimental effect on relationships. We advocate bringing the whole family – or main beneficiaries – together prior to formalising an FIC. The process can be a valuable tool for preparing younger generations of beneficiaries in the psychology of wealth.

As the first generation of beneficiaries matures, multiple FICs can be created for different family households. This allows for each household to reflect their own investment values, risk appetite and for us to manage their portfolios in line with this, all within an investment structure constructed by tax experts, that they are familiar with.

Edd Hollier is senior director & investment manager at EFG Harris Allday and Phil Pellegrini is taxation partner, private clients at Dains Accountants

The £400m rise on the total raked in during the same period last year continues an upward trend in the amount of tax levied on the assets of the deceased.

The average bill is on course to be £239,000 in the current tax year with around 30,000 families having to pay up, according to numbers run by Wealth Club. This represents an 11.5% increase from the £214,000 average paid three years ago.

The figures will only increase pressure on Chancellor Jeremy Hunt and his government colleagues to make changes to IHT in the Budget on 6 March.

See also: Premier Miton’s David Jane: Reframing income as an output rather than a style

It remains unclear as to whether the government will act though, as they are reportedly concerned it would be portrayed as a tax cut for the wealthy.

Nicholas Hyett, investment manager at Wealth Club, commented: “The government’s income from death duties is going up. That makes changes to IHT policy a careful balancing act.

“Cutting rates might win votes, since many see IHT as an unjust grab for money that’s already been taxed once. But the revenue earned is playing an important part in the government’s spending programme, and a shortfall would need to be made up somewhere else.”

Stacey Love, tax and estate planning specialist at Canada Life, said: “It’s clear from the data that IHT receipts are on a trajectory to break all previous records. While records might be broken, in reality IHT yields far less for the Treasury than other wealth taxes, for example capital gains tax.

“No doubt the rumour mills will go into over-drive ahead of the Spring Budget around the future of IHT, but one thing is clear, as of today, IHT isn’t just a tax on the wealthy, due to rising house prices and frozen tax bands.

“While we wait to see, what, if anything the Chancellor has up his sleeve around the future of IHT, early planning can help reduce the liability to this tax by making full use of the available exemptions and gifts to trusts.”

See also: Why investors need to take outlooks with a pinch of salt

Laura Hayward, tax partner at Evelyn Partners, added: “IHT is harvesting more in revenue than was ever forecast as rising house prices and growth in investment assets have boosted the value of estates over the last couple of decades.

“This has drawn more estates, and more assets in each liable estate, over the threshold at which IHT kicks in, which has been frozen at £325,000 since April 2009. Modest property downturns as we have seen in the last year or so will do little to dent this trend.

“In recent years there has also been a Covid effect on mortality which has further increased the overall IHT take.

“Despite being paid by a small proportion of estates, IHT is widely unpopular and continues to attract attention as one of the taxes the Chancellor could look to cut at his spring Budget, in an effort to boost the Conservatives’ electoral outlook.”

The portfolio is constructed to harness the potential for long-term capital growth and mitigate inheritance tax by investing in a concentrated selection of 20-30 Business Relief qualifying companies.

It has an annual management fee of 1.30% and is now available on the platforms abrdn, Fidelity, Fundment, Nucleus, Platform One and Transact.

Malcolm Schembri, portfolio manager, commented: “The AIM market has developed significantly since launching in 1995. It now has a combined market capitalisation of over £100 billion and is home to over 700 companies, of which nine are capitalised in excess of £1 billion.

“The potential for long-term capital growth is huge as we seek to identify those companies with quality management and proven business models. Companies like Fever-Tree, for example, which is now a household name.

“We avoid speculative investments and instead focus on the highest quality companies which have proven durability. There is currently compelling value available in the AIM market and we believe this is the right time to extend our offering to the public.

“Furthermore, the benefits of investing in AIM-listed companies extend beyond growth potential with investors being able to offset and mitigate inheritance tax.”

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This article first appeared on our sister publication, Portfolio Adviser