Over recent years, estate planning strategies have evolved due to recent and upcoming changes in legislation. Although many people think that living off cash and setting up trusts is all they need to do, this traditional approach may no longer be enough. Along with changes to reliefs, pensions will soon be included in estates for inheritance tax purposes. We review the latest considerations for your estate plan.
Traditional financial planning vs modern estate planning
A sensible approach to financial planning provides you with a solid foundation for your lifestyle today and your future retirement. However, due to the inclusion of unused pensions within estate values and changing inheritance tax thresholds, it’s expected that more estates will be taxed. Therefore, we need to consider how to use our wealth efficiently.
As more people’s homes increase in value, combined with unused pensions and savings, estate values can be much higher than expected. There might be other inheritance planning considerations – for example, if you’ve received a life insurance payout, this will also factor into your estate value.
With a sensible financial plan, you can think ahead to ensure sufficient income while preventing a high inheritance tax bill for your family in the future. Depending on your circumstances, this could involve drawing on pension income and cash savings to mitigate your tax liabilities.
What are the inheritance tax thresholds?
From April 2027, many unused pension pots and death benefits will be included in estates for inheritance tax. The inheritance tax threshold has been frozen at its current level until 2030. The rate of inheritance tax is currently 40% for anything that exceeds the limits.
The nil-rate band of £325,000 is available to everyone, and there’s an extra £175,000 for passing on property to direct descendants. Therefore, your son or daughter (including adopted and stepchildren) could have a £500,000 threshold if they inherit your home. If an estate value is more than £2 million, then a tapered structure gradually reduces relief.
If you own a business or agricultural assets, Business Property Relief (BPR) and Agricultural Property Relief (APR) help you calculate the rate of inheritance tax. From April 2026, 100% relief was capped at £2.5 million, with 50% relief above this amount. There are certain conditions that need to be met to be eligible for these forms of relief.
Estate planning, wills and trusts
Having an up-to-date, legally valid will should still be a key part of your estate planning. There are also certain trusts that can still help you to protect your wealth. However, it’s now recommended to combine trust planning with tailored tax planning to reduce future liabilities.
In view of higher tax obligations, your existing will and trust arrangements may no longer be adequate. If your current plan treats your pension as a separate entity, then you may need to bring this into your estate value. Estate planning is more than just ticking a few boxes; it’s about ensuring your wills, trusts, pensions, property, and business assets are considered.
Gain a clear view of your estate value so you can plan ahead. One growing concern for executors is when someone dies with multiple pensions, which may cause delays in distributing the estate. With untouched defined contribution pensions soon to be included within a deceased’s estate, executors will need to identify and report these to HMRC. For more guidance, see our blog What happens to small pensions when you die?
Wealth Management, Nottingham
If you have concerns over your estate and family wealth transfers, then it’s important to understand the true value of your estate. Without careful planning, families may face a larger Inheritance Tax liability than expected. By taking a proactive approach to your wealth management and inheritance tax, you can protect your family wealth for generations to come.
At Balance: Wealth Planning, we can help you assess your estate value and advise on suitable strategies to help you protect your wealth. Our financial planners will explain how your pensions could be liable for inheritance tax, along with any other forms of savings. We will give you clarity on your tax situation, so you can build and protect your legacy.
For tax-efficient financial advice and estate planning, get in touch with our team.
