Worried about inheritance tax? Then it’s time for a financial check

According to HMRC, in April 2025 alone IHT receipts reached £0.8bn.

The introduction of pensions into the scope of inheritance tax (IHT) is prompting action against hefty bills through financial protection.

Many people who did not need the income from their pension arrangement were leaving their pensions to the next generation as a tax-free vehicle that could be used to clear an IHT bill. We are now seeing many families opting to review the terms of their life assurance policies – or indeed, to purchase one to ensure that their families have enough readily available funds to pay their IHT bill.

It is worth remembering that the IHT bill must be met before probate can be granted. If this bill isn’t met within six months, the government will charge an interest payment of 8.25% as of May 2025.

What does IHT mean to me and my family?

Broadly speaking, after the use of allowances, the nil rate band (NRB) of £325,000 and the potential for Main Residence Nil Rate Band (MRNRB) relief of £175,00, the estate is subject to 40% tax (please see the example below).

*Note this is different for Agricultural Property, where the exemption is £1,000,000 and the estate is charged at 20%.

Example – under current rules

• Married couple H and W own a £500,000 property, and both have pensions worth £500,000 and investments of £300,000
• Both pensions exempt from IHT
• Allowances 2x£325,000 NRB
• Allowances 2x£175,000 MRNRB

In this example the estate is valued at £800,000 and the allowance would be jointly £1,000,000, so the estate would be IHT-free.

However, the position changes dramatically after April 2027 with the new proposed changes.

Example – after April 2027

• H and W own a £500,000 property, and both have pensions worth £500,000 and investments of £300,000
• Total joint estate left to each other, then children: £1,800,000
• Allowances 2x£325,000 NRB
• Allowances 2x£175,000 MRNRB
• Residual estate £800,000 @40% = £320,000 tax bill

As we can see from the above examples, since November last year, after the government announced it would include a person’s pension in their estate from 2027, rules could significantly impact some individuals. The financial advice industry has been extremely busy looking after individuals who have been requesting clarification on what this measure could mean when they pass on wealth to their families.

Inheritance tax (IHT) is charged on the value of a person’s estate when they die. The first £325,000 is tax-free, or it is £500,000 if the estate is worth less than £2m and includes a main residence left to a descendant. If you have a pension, this new rule raises the value of your estate – and therefore puts pressure on the value of your IHT bill when you pass away.

This new rule has encouraged people to look into the status of their estate (and make changes where necessary), and to leverage tax-friendly tools such as gifts.

The government allows for gifts under a certain threshold to be free of IHT. But the so-called seven-year rule dictates that any gifts over that threshold are considered part of your estate until seven years after you die.

One of the simplest and easiest to understand is a whole-of-life plan set up for the level of the IHT liability. A whole-of-life policy can be purchased by single, unmarried individuals and married couples, and it lasts for the entirety of a person’s life and pays out when the individual passes away. A married couple could also take it for IHT purposes on the second life and the policy would be written in a trust to move it outside of the estate.

Individuals who might want to gift an amount above their exemption threshold should seek financial advice to understand how to best protect against the risk of IHT on the gift. Once again, in an effort to alleviate the burden that these measures bring, this has been an area where individuals have been looking to take out a specialist type of protection called a gift inter vivos plan, which ensures that the sliding scale of IHT bill is met if you die within seven years of making the gift.

When undertaking any policy, cost should, of course, be a heavy consideration factor. The cost of protecting against the IHT liability from a gift should be considerably lower than the actual liability that the family would need to meet from the estate.

In some cases, a joint life second death whole-of-life assurance policy could be a much more cost-effective plan. This type of protection covers two individuals and, as its name suggests, the payout only occurs after second death which means that it is an excellent vehicle for mitigating the IHT liability as, in most cases, the liability will only be incurred after the second spouse passes away.

Taking the leap

It could be that the best solution for individuals is a blend of different products the market offers. And the truth is the financial planning landscape is constantly evolving, and change has accelerated since the government announced new rules in the Autumn Budget.

And indeed, undeniably the Budget has made the IHT planning landscape more complex and susceptible to pitfalls, therefore making the use of professional financial advice more important than ever. Doing so should ensure your money is working for you in the best possible way and that the ends justify the means.

The best financial plans for individuals and their families are laid out in accordance with their specific needs, and it could be the case that they include some of these complex life insurance policies. Either way, when thinking about financial health, the number one priority to consider should be a robust, professionally developed financial plan that will ensure you and your family are well looked after for the rest of your life and beyond.

Our experienced financial planners have relationships with market-leading firms that provide all types of financial protection, so they can ensure clients always benefit from the most efficient tools that will optimise their financial plans. If you would like to understand how the value of your estate could affect your inheritance tax bill now and in the future, and would like to create or review a plan to minimise its impact, get in touch with us.