How smarter succession planning can help you adapt to IHT changes

The announced changes to the UK’s inheritance tax system mark a big shift in how estates are taxed. Planning ahead and staying informed will be key to managing these changes. Reviewing your estate plan, making strategic gifts, rethinking pension arrangements, and keeping up with tax relief options can help reduce tax liabilities and make sure your wealth is passed on as you intend.

What’s changed?

Changes announced in the 2024 Budget have prompted many to re-evaluate their situation around passing on money to the next generation.

Regarding inheritance tax (IHT), while the nil rate band (£325,000) and residence nil rate band (£175,000) remain frozen until 2030, it is essentially a stealth tax, as the value of assets will likely rise – due to inflation, for one – over the next five years. So, by keeping the bands the same, and with the value of your estate creeping over these frozen thresholds, you are essentially receiving less of a benefit for your money.

While there are also impending changes to agricultural, business property and AIM relief, the change that will affect more people, however, is that from April 2027 pensions will come under the scope of inheritance tax. Previously you could pass on wealth to your children through unused pension funds without penalty – so this new rule will mean that many will need to adapt their plans.

Watch our recent succession planning webinar with an example (at 4:20 minutes) of what it could mean for a person with a pension of £400,000 and the rest of their estate valued at £1m.

The webinar is also a good way to familiarise yourself with the general rules of IHT.

The tools to help you revise your plans

When you think about whether you may be facing IHT challenges, you should model for how much money you might have in future – accounting for investment returns and other factors. You can get a realistic assessment of your potential financial outcome with our powerful tools that you can use for free to help you visualise various outcomes.

- The wealth planner lets you input a number of relevant figures to help you plan ahead – such as your age and planned retirement age, your income and level of savings now, and how much of an income you would like to draw in future considering inflation, different return levels (driven by risk) and so on.

- The projection tools help you to identify if your goals are realistic and to first answer the question: “Can you meet your own needs in retirement?”

- The webinar’s example (11:00) shows you what it is like to explore different permutations, such as taking money out for a car and health costs, and illustrates the different levels of gifting that you may be able to afford without hindering your ability to meet your own goals.

Overall, using the tools, either on your own, or in consultation with one of our team, can offer a highly personalised assessment of your future potential. From that you can derive a sound strategy to incorporate your gifting wishes (including how much and when to make gifts) – and figure out how best to manage and mitigate your inheritance tax liabilities.

The timing can be crucial. For example, it may be much more beneficial to lend your financial support to your children when they are younger – say from their 20s to 40s – rather than later in life when they may be more financially secure themselves. Modelling helps you to make these decisions with more confidence, and gives you the clarity to have important conversations about your plans.

Remember, gifts don’t have to be a physical transfer of funds – you may want to take your children (and theirs) on holiday, thus saving them the expense. Experiences shared can be much more enjoyable and fortify family bonds across generations.

Understanding the trade-offs between tax efficiency and control

If you are gifting money to your children or grandchildren, it’s worth asking how you feel about giving them an inheritance. Maybe it could demotivate them or cause them problems over time, and you should also consider the impact of events like divorce – you might be comfortable giving money to your children, but perhaps not so much to other parties if a marriage dissolves.

There are things you can do to have control over the money in the future, but mostly there is a trade-off between tax efficiency and control.

Planning how and when to gift becomes even more important

If you hand over money to beneficiaries as a gift from excess income or from your £3,000 annual exemption, this is usually a very tax efficient way of doing so – and can be outside of your estate immediately – but naturally you have little control over what they do with the money.

At the other end of the spectrum, there are structures like discretionary trusts – where the trustees have complete discretion as to when to pay out to the beneficiaries. This allows you to absolutely control when money is passed on, deciding for example, in what order to release funds over time, and to who, and who to exclude. These trusts, however, are not particularly tax efficient.

While there are the usual nil rate band allowances, assets in a trust when invested are subject to the highest rates of income tax (45%) and capital gains tax (24%). There is also more administration, you may need to keep accounts, file tax returns, so this route is definitely more complex – but you do get control.

There are many other nuances to consider, such as giving away the growth in the asset rather than the capital itself, considering family investment companies and more – the point is, the area of gifting money, especially for larger estates, can be highly complex, and most families will need tailored financial advice to maximise their circumstances.

Read more about the advice options that may suit your needs.

It all starts with a conversation

If you are in the fortunate position to be able to gift to family members, you could kick things off with a frank conversation with loved ones about your plans and wishes. This can help to overcome the frequent disconnect between generations and help them to plan better, too.

It could also be very worthwhile to watch our recent webinar – Preparing the next generation: Smart succession planning amid IHT changes.

In 50 minutes, we provide more detail on the points above (with questions from attendees) and the various examples can help to bring your own potential to life – and show you the relevant steps you can take to lessen the impact of changes to the IHT regulations.

You can then continue the conversation with us. In the first instance you can contact us for a free, no-obligation consultation (not personalised financial advice) – just get in touch.

Please note, the value of your investments can go down as well as up.

Our advisers offer restricted advice that relates to Netwealth’s products and services and does not consider the whole market. Netwealth does not provide tax or legal advice and does not advise on transfers of pensions with safeguarded benefits.