Inheritance Tax (IHT) has become a growing concern for ordinary families in the UK. It used to feel like a tax that only affected the very wealthy, but freezing of the tax-free allowances since 2009 despite rising house prices and overall asset growth, has pushed more estates over the threshold. Now, significant changes announced in the Autumn Budgets of 2024 and 2025 mean that even more families will be affected, particularly those with substantial pension savings or family businesses, including farms.  

The standard Nil Rate Band (NRB) currently sists at £325,000, anything above that figure is normally taxed at 40%. The Residence Nil Rate Band (RNRB) currently provides an additional £175,000 per person when leaving the family home to direct descendants. These thresholds are now frozen until April 2030, meaning fiscal drag will continue to pull ever more estates into the IHT net. 

Pensions were once one of the most effective tools for IHT planning, as pension funds usually fall outside of the estate for tax purposes. So, people spent their other savings first, in the knowledge that anything left in pensions would be IHT free. However, from April 2027, unused pension funds and death benefits will be included in your estate for IHT purposes. This fundamentally changes the role of pensions in estate planning and creates a potential double tax charge. 

40% IHT will be payable on the fund, then income tax on withdrawals if you die after 75. For a £500,000 pension fund, this could mean £200,000 IHT, leaving £300,000 for beneficiaries, who might then pay £135,000 (At 45%) income tax on withdrawals, leaving just £165,000. So, the strategy now flips. It may make sense to draw down pensions during your lifetime and gift the proceeds rather than leaving large pension funds liable to double taxation. 

Many a headline has bought attention to the new cap to Agricultural Property Relief (APR) but it’s important to know this also applies to Business Property Relief (BPR). Only the first £1 million of combined business and agricultural assets qualifies for full relief; above that, relief drops to 50%. The £1 million threshold is however transferable between spouses, giving a combined £2 million for married couples. 

For farming families who are asset-rich but cash-poor, this change is particularly acute and may force the sale of land or assets to pay the tax, even with the option to pay in interest-free instalments over 10 years. 

How much can pass free of tax? 

When one spouse leaves everything to the other, Inheritance Tax is normally deferred. The survivor can then inherit the unused allowances, doubling the potential tax-free amount on second death. With both Nil Rate Bands and Residence Nil Rate Bands available, a married couple leaving the family home to their children can pass on up to £1 million with no inheritance tax to pay. 

It is important to remember that these rules provide little support for unmarried couples or for people without direct descendants. There is also a tapering rule affecting estates worth more than £2 million. In those cases, the Residence Nil Rate Band is gradually removed and disappears completely once an estate reaches £2.35 million. 

What can you do about it? 

There is no single approach that fits all estates. What matters most is having a plan that meets your personal goals and adapts as life changes. Some commonly used strategies include: 

Spend it 

One straightforward way to reduce an estate is simply to enjoy the money. Holidays, celebrations and experiences can be priceless in ways that do not increase the estate’s taxable value. Purchasing potentially appreciating assets such as antiques and collectables can have the opposite effect so caution is needed. 

Gift it 

Making gifts directly to loved ones can be hugely rewarding. Many become completely tax-free if the donor survives seven years (known as Potentially Exempt Transfers or PETs). Annual gift exemptions (£3,000), small gifts (£250), and gifts on marriage all become more important in the current environment.  

Regular gifts made from surplus income can be immediately outside of the estate if structured correctly and properly documented.  

Trusts can also be a flexible way of supporting beneficiaries while retaining appropriate control. Loan Trusts and Reversionary Trusts in particular allow access to the original capital while removing future growth from the estate. 

Shelter it 

Since pensions are set to no longer offer the haven they currently do, Business Relief has become even more important. Investments can become inheritance tax-free after two years of qualifying ownership while allowing you to remain invested and to retain control. Certain other assets such as AIM shares can qualify for 50% rather than full relief. 

Insure it 

A Whole of Life insurance policy can be written into trust to provide a lump sum that helps fund the eventual inheritance tax bill. With higher IHT exposure due to the recent changes, this becomes more useful, particularly for families with illiquid assets like businesses or farms. However, the cost of premiums can become significant in later life or where health issues are present, so advice is essential. 

Additional considerations 

Higher Capital Gains Tax rates (increased from 10%/20% to 18%/24% in April 2025) complicate lifetime gifts. If you are considering gifting assets during your lifetime to reduce your estate, you may trigger a CGT charge on the transfer (unless it qualifies for holdover relief). This creates a tension: holding assets until death avoids CGT but incurs IHT; gifting during lifetime avoids IHT (if you survive 7 years) but may trigger CGT. 

Ultimately, sound planning is about striking the right balance. You want to protect your own financial security, give support where it is needed and reduce unnecessary tax if possible. 

Why professional advice matters 

You may have a sense of whether your estate is above the threshold, but do you know the likely inheritance tax bill today or what it could grow to in ten- or twenty-years’ time? With pensions falling into IHT, BPR/APR capped, and nil-rate bands frozen until 2030, the old strategies no longer work. Rules are complex and personal situations evolve which is why tailored guidance can make such a difference. 

The OBR estimates that IHT receipts will rise from £7.5 billion in 2024-25 to £11.6 billion by 2029-30, driven by frozen thresholds and the changes to pensions and reliefs. More families than ever will be affected. 

At Paladin Financial Planning, we will take a detailed look at your current position and long-term plans. We will then provide personalised strategies designed to preserve your wealth and reduce exposure to unnecessary tax. We are also here to review your planning regularly because life does not stand still. 

If you would like to speak with me about protecting your estate for the next generation, contact us today for a friendly and informative conversation. 

By Joseph Cooper FPFS