Many people in the UK feel inheritance tax (IHT) can be unfair. A March 2024 YouGov poll found that 51% of Britons surveyed viewed IHT as either ‘unfair’ or ‘very unfair’, while only 23% felt it was ‘fair’ or ‘very fair’. These views have remained relatively consistent over recent years.
It is not hard to see why. An IHT bill of thousands or even hundreds of thousands of pounds means considerably less of a legacy going where it was intended. The impact is felt most by the families and loved ones left behind. While there are strategies to mitigate or even eliminate this liability – such as gifting or investing in companies eligible for tax relief – the Autumn Budget 2024 introduced major changes to IHT rules, one of the biggest changes is concerning pensions. These developments make a financial adviser’s role in a client’s estate planning more important than ever.
Pensions and IHT – what’s changing?
Until now, private pensions were generally excluded from the value of an estate for IHT purposes. But, from April 2027, any unused pension pots and death benefits paid from a pension will fall within the scope of IHT.
Final salary (defined benefit) pensions: Final salary pensions provide a fixed percentage of a client’s salary, which are paid out for the remainder of your lifetime. When the pension holder passes away, it usually continues to be paid to their spouse – it cannot be left as part of your estate.
Defined contributions pensions: A defined contribution pension accumulates over time based on contributions and investment returns. Clients can take up to 25% of this pension pot ‘tax-free’ and then draw down the remainder throughout their lifetime. Currently, unused pension can be left to beneficiaries without triggering an IHT charge. This will change in April 2027, as such pensions will be included in the estate’s value for IHT purposes.
In addition to IHT implications, there are other tax considerations to keep in mind.
Income tax on death benefits:
- Before 75: If a client passes away before 75, beneficiaries will receive the remaining value of their unused pension pot income tax-free.
- After 75: If the client dies after 75, beneficiaries will be required to pay income tax on any withdrawals from the pension, charged at their usual income tax rate.
We expect more information to be released on this shortly as the government’s technical consultation on how to implement these changes closed on 22 January.
Business Relief and IHT: What you need to know
At present, if a person owns shares in a company that qualifies for Business Relief (BR), upon their death their estate can claim 100% IHT relief on the value of those shares, provided they were owned for at least two years and still held at the time of death. From April 2026, however, significant changes will take effect.
New £1m Business Relief allowance: The current uncapped allowance for 100% IHT relief on BR-qualifying shares will be replaced by a £1m limit. Any qualifying shares over £1m will be eligible for 50% relief (equivalent to an IHT rate of 40% x 0.5 = 20%).
AIM-listed shares: Shares in BR-qualifying companies that are listed on the Alternative Investment Market (AIM) will be eligible for Business Relief at the reduced rate of 50%, an effective IHT rate of 20%. This does not use up any of the £1m Business Relief allowance.
Who will be affected by these changes?
The changes to Business Relief should affect relatively few estates when introduced. According to HMRC, out of the 4,170 estates that claimed Business Relief in the 2021/22 tax year, 88% made claims of £1m or less. It is also worth noting that, from 2026, those estates with qualifying holdings over £1m will still benefit from 50% on the remainder, which is a significant IHT reduction for most higher-value estates.
Additionally, we understand where someone sets up multiple trusts on, or after 30 October 2024, the government intends to introduce rules to ensure the £1m Business Relief allowance is divided between trusts. We expect further information to be available in the coming months.
The revisions to pensions and Business Relief present both challenges and opportunities for financial advisers. By staying ahead of the curve, advisers can help clients adapt their estate planning strategies to minimise their IHT liabilities while making the most of the available reliefs.
Diana French is retail strategy director at Triple Point
