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Business owners and individuals will soon be living in a fundamentally changed world when it comes to managing pensions and inheritance tax (IHT) liabilities. The move to include unused pension savings and some pension death benefits in the value of estates for IHT purposes has widened the scope of taxable assets, forcing a rethink in strategies.
It’s little wonder that 54 per cent of UK adults are planning to adjust their retirement or estate planning in response to the government’s changes.
For owner-managers, safeguarding your legacy requires thinking holistically about what you want to pass on, what you need to hold on to, and how to best support your loved ones. Here we’ll look at what’s changing, how it affects you, and cover practical strategies to manage these new liabilities.
What are the changes to pensions and IHT?
From 6 April 2027, major reforms to inheritance tax rules around pensions will come into effect. This means that unused pension funds, along with certain pension death benefits, will now form part of an individual’s taxable estate for inheritance tax purposes.
Until now, pension pots, particularly those held in Defined Contribution (DC) schemes, have been popular for estate planning because they've generally fallen outside the scope of IHT. This created a significant tax planning opportunity allowing wealth to pass down generations relatively tax-efficiently.
However, the view of the current Government is that this looks more like tax avoidance rather than retirement planning, leading to this decisive action to include most unused pension assets in estates for IHT calculations.
Key points to know:
What do these changes mean for business owners?
If you're a business owner, the impact of these reforms can be significant, especially if your wealth is largely held in pension schemes intended as a family legacy or as part of succession planning.
Historically, pensions offered a straightforward, tax-efficient way to pass wealth between generations. Now, however, it's crucial to rethink this view and consider your pensions not just as retirement pots, but as a part among many components of your overall estate planning.
Rethinking the role of your pension
Instead of viewing your pension primarily as a tax-free inheritance vehicle, consider it as a tool that needs careful balancing between retirement income, inheritance planning, and overall tax efficiency.
Succession as strategy, not just transfer
Succession planning isn't just a way to transfer assets. It requires aligning your business and personal finances strategically. If your family’s financial future is closely tied to your business assets, then you’ll need to consider how you want to divide and ring fence certain elements to ensure they’re ready for their intended use.
Expand your planning process
With these reforms, pensions have become significantly more complex. Owners will need to think more proactively about their legacy: understanding that increased administrative obligations are now part of the package. Thinking ahead and embracing expert advice isn't merely advisable; it’s essential.
How to manage your liabilities
Despite the headline fear, effective estate planning can still mitigate the impact of these changes. Let’s look at some practical solutions:
Spend more, early
One straightforward approach is to withdraw and use pension funds strategically before the new rules take effect.
● Withdraw funds before 6 April 2027.
● Spend or gift money now to reduce your taxable estate.
● Caution: Excessive withdrawals may inadvertently push you into higher income tax brackets.
Gift strategically
There is still the option to use lifetime gifts to family or trusts that can reduce the taxable size of your estate.
● Annual tax-free gift allowances (£3,000 per annum, per individual).
● Larger sums become exempt after seven years.
● Gifts from regular income can be exempt from IHT if they don’t affect your living standard.
Use exemptions
The nil-rate band (£325,000 per individual) and the additional residential nil-rate band (£175,000 when passing on your main home to direct descendants) mean couples can potentially leave up to £1 million tax-free to their heirs.
● Transfer unused nil-rate bands between spouses.
● Ensure your estate qualifies for residential nil-rate relief where applicable.
Pension planning review
Revisit the structure of your pension benefits, particularly focusing on:
● The beneficiary nominations.
● The types of death benefits provided by pension schemes.
● Exploring insured death-in-service schemes outside pension structures that may remain exempt from these changes.
Business relief (BR)
Assets qualifying for Business Relief can achieve significant reductions in IHT.
● Unquoted shares in your business generally qualify for 100% BR.
● Structured correctly, BR allows your heirs to inherit the family business without incurring IHT.
● Remember to regularly review business structures to maintain BR eligibility.
Trusts for controlled legacy management
Trust structures enable controlled distribution of wealth while potentially reducing IHT liabilities:
● Discretionary trusts can help manage large inheritances responsibly.
● Trusts can provide protection against family disputes or divorce, safeguarding family wealth.
Getting the Right Support
Planning your pension and IHT strategy is a major priority for most businesses, but making the most of the opportunities available is easier when you have the right expertise in your corner. Whether it’s restructuring your business to protect against future tax liabilities, revising your pension contributions, or planning your personal estate, we’re ready to help.
At Haines Watts, we offer tailored, practical solutions to help you navigate these complexities. Our dedicated teams can help you:
● Revisit and restructure your pension strategies.
● Review your estate planning to utilise tax allowances and exemptions effectively.
● Set up trust structures and other inheritance planning mechanisms to safeguard your legacy.
● Provide ongoing advice and support to adapt to future tax changes proactively.
Speak to a specialist at Haines Watts today and take proactive steps to ensure your wealth supports those you care about most in the most tax-efficient way possible.
