Inheritance Tax planning should begin at 50, not 70
Forming your Inheritance Tax plan at 50 could save you nearly £400,000 compared to starting at 70. Learn why long-term planning matters when passing down your wealth.
According to Today’s Wills and Probate, affluent families who begin estate planning at age 50 pass on £397,000 more on average than those who begin at 70.
The need for advance planning has never been more pressing. New pension rules and frozen Inheritance Tax (IHT) thresholds have made estate planning no longer a “nice to have” but an essential facet of many families’ financial plans.
Delaying the inheritance discussion could cost the top 10% of wealthy families an estimated £12.3 billion in preventable IHT when new pension rules come into effect next year.
This article reviews the key IHT rules impacting your wealth, the importance of timing, and how early estate planning might save you and your loved ones thousands.
Setting the scene: from April 2027, pensions will attract Inheritance Tax
New rules for pensions and IHT were first announced in the 2024 Autumn Budget. These stipulated that unused pensions or pension death benefits would be included as part of the estate and, therefore, would be liable for IHT.
Until now, pensions have sat outside your taxable estate. However, this is set to change once the new legislation comes into effect in April 2027.
The new rules aim to make pensions less useful for intergenerational wealth transfer, which many financial plans have historically relied on.
The government expects to raise an extra £710 million in the 2027/28 tax year alone, according to HMRC policy analysis.
Frozen Inheritance Tax thresholds are forcing more estates to pay more tax
More estates are also being exposed to IHT due to relief thresholds being frozen until April 2031.
IHT thresholds provide relief up to particular limits:
- Nil-rate band: £325,000 per individual.
- Residence nil-rate band: £175,000 per individual, as long as the main residence passes to direct descendants (for example, children, foster children, stepchildren, grandchildren, or great-grandchildren).
However, these bands have been frozen at the same levels until April 2031, and the nil-rate band has remained at £325,000 since 2009.
In theory, IHT thresholds should rise in line with or exceed the rate of inflation. However, when they are frozen, the value of your estate may continue to increase, pushing more of it into the taxable range and increasing the amount of IHT due on death.
This means your beneficiaries will be left with less to inherit.
Long-term strategies like lifetime gifting can help you gradually lower the value of your estate
Rather than leaving estate planning until the last minute, you may be better off planning much earlier. In fact, Today’s Wills and Probate has identified that the ideal age to begin estate planning is 44.
The earlier you begin thinking about your estate plan, the more options you have to reduce a potentially large bill.
Long-term strategies, like lifetime gifting, can help you gradually reduce the value of your estate. You can learn more about lifetime gifting in our previous articles:
- How to support your children and grandchildren without compromising your dream retirement
- Giving while living: 3 reasons to slow down and make a plan
- The ultimate balancing act: Gifting versus saving
A lifetime gifting strategy involves giving away your money each year, which might benefit your estate further down the line by reducing how much of it is taxed. The earlier it is put to use, the more opportunity you have for creating tax-efficient wealth – more on this in the section below.
That said, gifting is not the only option for reducing an IHT bill, and we’re aware this isn’t right for everybody. Speak to your Kellands financial planner to discover how we could help you reduce the value of your estate.
The later you leave estate planning, the fewer the options available to reduce Inheritance Tax
Due to the strict rules being imposed, many families can’t afford to procrastinate over estate planning. The later you leave it, the fewer options you can take advantage of.
To give an example, if you begin gifting money to your children at age 50 and die at age 80, you would benefit from 30 years of tax-efficient wealth transfers. Using the tax-free annual gifting exemption alone, which allows you to pass on £3,000 each tax year, you could reduce the value of your estate by £90,000 during this time.
Leave it too late, and you might wish to give more over a shorter period. This leaves you vulnerable to the seven-year rule, as larger gifts are likely to be considered potentially exempt transfers (PETs).
A PET is a gift that exceeds the annual gifting allowances. For example, you might choose to give £18,000 as a lump sum rather than £3,000 a year over six years. This means that the lump sum amount not covered by the annual exemption would be considered a PET (£15,000), whereas the gradual gifting option would not.
If you die within seven years of transferring the funds, the PET will be liable for IHT based on a sliding scale of how much time has elapsed.
Read more: What is a “potentially exempt transfer” and how could it affect your family?
Non-gifting strategies are also better actioned earlier in life (for the most part). If you start planning at 50 instead of 70, you have a greater suite of options to choose from.
Start the conversation with your Kellands financial planner
Beginning your estate planning earlier not only gives you access to valuable IHT-mitigation strategies. It also offers you valuable peace of mind.
Our award-winning team can help you discover your estate’s best route to tax efficiency, whether through lifetime gifting or other bespoke solutions.
If you’d like to restore your confidence for the future, reach out to a member of our team today.
Email us at hale@kelland.co.uk, or call 0161 929 8838.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
The Financial Conduct Authority does not regulate estate planning or tax planning.