Inheritance Tax planning is becoming anything but straightforward

At the most basic level, there is the standard £325,000 Nil Rate Band and, where the relevant conditions are met, the additional £175,000 Residence Nil Rate Band. There are then transferable allowances between spouses and civil partners, the tapering of the Residence Nil Rate Band for larger estates and, importantly, conditions around who ultimately inherits the family home.

Lifetime gifting

Lifetime gifting introduces another layer of complexity. Potentially Exempt Transfers, Chargeable Lifetime Transfers, the seven-year rule, taper relief, annual exemptions and gifts made out of surplus income all operate differently, while the order and timing of gifts can also matter. Even the apparently familiar seven-year rule is often misunderstood, particularly taper relief, which does not simply mean that the value of every gift gradually reduces over seven years.

The exemption for gifting out of surplus income is another good example. It can be an extremely valuable planning tool, but there is no simple monetary limit that someone can safely give away each year. The gifts need to meet specific conditions, including being made out of income and leaving the individual with sufficient income to maintain their normal standard of living, which means good record-keeping and a proper understanding of the wider financial position can be important.

Business and Agricultural relief

For business owners and farming families, Business Property Relief and Agricultural Property Relief bring further considerations, particularly following the recent changes to the amount of qualifying property that can benefit from 100% relief. Decisions around succession, ownership, gifting and control therefore increasingly need to be considered alongside the tax position rather than as a separate exercise.

Pensions

Pensions will add perhaps the most significant new dimension from April 2027, when most unused pension funds and pension death benefits are brought within the scope of Inheritance Tax. For many years, pensions have often been deliberately preserved later in life because of their favourable treatment on death, but that approach will now need to be reconsidered for some families.

That does not, however, mean the answer is simply to start withdrawing pensions more quickly. Taking additional pension income may create an Income Tax liability; withdrawing money can simply move capital from one taxable asset to another, and gifting it introduces a separate set of rules. Any decision also needs to consider whether the individual can genuinely afford to give capital away while retaining sufficient flexibility for later life, unexpected expenditure and potentially the cost of care.

Having a plan

This is where I think the real complexity now lies. Inheritance Tax planning is no longer simply about calculating a future liability; it increasingly involves deciding which assets should be spent first, whether pension withdrawals should change, how much can reasonably be gifted, whether trusts or life assurance have a role, how the eventual tax liability will be funded and, above all, whether the planning remains consistent with what the family actually wants to achieve.

It’s not all about the tax

There is also a danger that, in trying to minimise tax, people lose sight of the purpose of the wealth itself. Giving significant amounts away may reduce a future Inheritance Tax liability, but it is not necessarily good planning if it compromises someone’s own financial security or leaves them uncomfortable about what they have retained.

For that reason, some of the most useful Inheritance Tax planning starts not with the tax rules but with a detailed understanding of someone’s income, expenditure, assets and longer-term plans. Cashflow modelling can then help establish what they are likely to need for themselves, what they might realistically be able to spend or gift during their lifetime and how different decisions could affect both their future security and the eventual estate.

What is your legacy?

The objective should therefore rarely be simply to achieve the lowest possible Inheritance Tax bill. It should be to use wealth intelligently during life, retain sufficient security and flexibility, help family or other beneficiaries where appropriate, and ultimately ensure that assets pass in a way that reflects the individual’s intentions.

Inheritance Tax remains an important part of that discussion, but for many families today, the tax calculation is only the starting point.

Contact Old Mill if you need help with inheritance tax planning.