What crucial transformation is poised to reshape estate planning?
Estate planning has always been pivotal in managing how wealth is passed on, but changes to pension rules from 6 April 2027 will reshape the landscape. Historically, pensions have served as both a source of retirement income and a tax-efficient tool for intergenerational wealth transfer.
However, as pensions are now part of the taxable estate upon death, some individuals may need to reassess their strategies to minimise Inheritance Tax (IHT) liabilities. The era of relying on tax advantages to preserve pensions as the last untouchable asset in decumulation is nearing its end. Instead, a reimagined approach to wealth-building and distribution will be necessary.
Why April 2027 is a game-changer for estate planning
From 6 April 2027, the inclusion of pensions in the IHT calculation signifies a significant turning point. Until now, it has been common practice to access other assets first, leaving pensions untouched to take advantage of an exemption from IHT.
This has incentivised families to maximise the value of their pensions across generations. However, with the Autumn 2024 Budget announcement introducing this change, it is clear that traditional strategies are no longer sufficient.
Passing wealth to future generations
While those in the decumulation phase reconsider how to draw down their assets, the impact is equally significant for individuals in accumulation phases. For people in their accumulation years (30s to 50s), during which the focus is on building wealth for retirement, pensions must now be assessed within the broader context of estate planning.
While pensions still provide immediate tax relief on contributions and secure long-term retirement income, their implications for IHT upon death in certain situations may make them less attractive for passing wealth to future generations.
Diversification: The emerging strategy
Given the changing tax priorities, diversification beyond pensions becomes an essential strategy. Individual Savings Accounts (ISAs), which offer tax-efficient growth and income, are one example. ISAs provide incredible flexibility, allowing individuals to access funds at any time without penalty. However, post-April 2027, ISAs will remain part of the taxable estate for IHT purposes, just like pensions.
For those looking to break free from traditional estate planning tools, Business Relief (BR)-qualifying investments can offer appealing alternatives. Investments in private trading businesses or certain AIM-listed companies qualify for significant IHT relief after two years, helping to avoid or reduce tax charges.
Considerable risk tolerance strategies
With the introduction of a £1m Individual Business Relief Allowance in April 2026, unlisted investments or agricultural property gain an IHT-free cap, while investments exceeding this figure receive 50% relief.
Qualifying AIM-listed company shares also attract 50% IHT relief but do not benefit from the £1m allowance. While these benefits are enticing, BR investments carry high risks. Their value can fluctuate, and any tax relief depends on the invested businesses maintaining their status as qualifying assets. This makes such strategies suitable only for those with considerable risk tolerance.
Re-evaluating traditional solutions
The urge to maintain pensions as a central pillar of financial planning is understandably strong. However, it has become abundantly clear that the post-2027 estate planning landscape requires a more balanced and multifaceted approach. Although pensions are valuable for retirement income due to upfront tax savings, many innovative financial tools and investment vehicles are likely to be considered to develop flexible, efficient strategies that also protect long-term generational wealth.
For families with larger estates, combining approaches such as BR investments with various other strategies could unlock more nuanced opportunities. The earlier you explore these options, the better positioned you are to minimise your tax burdens and maximise your family’s inheritance.
This article does not constitute tax, legal or financial advice and should not be relied upon as such. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. For guidance, seek professional advice. The value of your investments can go down as well as up, and you may get back less than you invested. past performance is not a guide to future performance.
