hanges to inheritance tax (IHT) coming over the next three years, outlined in our feature article on the Autumn Budget, could mean that a review of your estate planning is required. There are two main areas that need to be examined. PENSIONS If part of your estate planning involves pension benefits paid on death, then the new rules from 2027/28 could significantly increase the IHT liability on your estate. This applies both to traditional death in service life cover provided by your employer and to residual pension funds, unused at the date of death. The example below shows one of the many impacts of the reform. Pension benefits become subject to IHT, also increasing the overall value of the estate, which may lead to a loss of some or all of the residence nil rate band. What can be done to mitigate the extra IHT liability depends upon a variety of factors, not the least of which is where you are on the retirement journey. BUSINESS AND AGRICULTURAL RELIEFS If you own shares in a private business, a partnership interest or agricultural land, the £1 million overall cap on 100% IHT relief means you can no longer assume these will pass to your beneficiaries free of IHT if you die after 5 April 2026. Relief of 50% will be available above the cap and the IHT can be paid over ten years in interest-free instalments. In theory, a married couple or civil partners can transfer business assets and/or agricultural land worth £2 million before IHT bites, but as the £1 million limit is not transferable, each partner would need to make their own bequest. As a result, it could be necessary to restructure ownership and revise wills before 6 April 2026 arrives. Among the alternatives are to make lifetime gifts rather than wait until death. The sevenyear rule, which puts outright gifts made over seven years before death beyond the reach of IHT, remains in place. ✢ The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change. The Financial Conduct Authority does not regulate will writing and some forms of estate planning. 6 Credit: Jack Frog/Shutterstock.com Time to review your estate planning? The October Budget could mean a radical rethink in your estate planning. ESTATE PLANNING C Pensions and IHT in 2027/28 Joan, a widow aged 81, dies with an estate of £1.75 million and various pensions, including some inherited from her late husband, with a total value of £500,000. These will provide a lump sum death benefit to her grandson, James. At death, Joan’s estate will also benefit from the transfer of her late husband’s nil rate band and residence nil rate band. Death before 2027/28 (£) Death in 2027/28 (£) Estate 1,750,000 1,750,000 Pension 500,000 500,000 Nil rate bands 650,000 650,000 Residence nil rate bands 350,000 225,000† Inheritance tax due -300,000 -550,000 Income tax on pension* -225,000 -170,000 Net of taxes estate 1,725,000 1,530,000 † Joan’s residence nil rate band is reduced by £125,000 because of the tapering that applies once the £2,000,000 taper threshold is crossed. * Assumed to be at 45%. Income tax is charged on the value of the remaining pensions after deduction of their share of the overall IHT bill. In theory, a married couple or civil partners can transfer business assets and/or agricultural land worth £2 million before IHT bites, but as the £1 million limit is not transferable, each partner would need to make their own bequest.
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