Make plans, not changes: why caution is needed ahead of proposed new inheritance tax rules

It’s already been almost three months since the Autumn Budget. There has now been time to look into the details of the proposed changes, particularly around complex areas such as pensions, inheritance tax (IHT), business relief (BR) and agricultural relief (AR).

Going into a new year, it’s understandable to want to jump right into adjusting your financial plan in anticipation of these new rules. However, I’d counsel caution when considering any changes. 

As ex-Prime Minister Harold Wilson said, “A week is a long time in politics” and we have years until many of these potential new rules are expected to come into force. During the consultation and transition periods, we could see amendments to the legislation, and pre-empting these could pose a risk if the final rules look different than initially expected.

With that being said, this doesn’t mean you should ignore the potential impacts of Rachel Reeves’ Budget completely. In fact, now is the time to discuss your options and choices and begin to think about how you might start to navigate what could be some difficult choices.

Here’s the approach I’m taking with my clients over the next 12 months: 

• Speaking about the proposed changes to understand the details
• Discussing any concerns they may have about these potential new rules
• Begin to look at mitigation options that could suit them, and their goals and objectives

There was a long list of announcements in Reeves’ first Budget, but the areas most likely to impact you were the new rates of capital gains tax (CGT) and the changes to reliefs for IHT.

Specifically, pension assets are intended to be included in the value of your estate for the calculation of IHT from April 2027, and from April 2026 the business and agricultural property reliefs may be capped at £1 million, with a 50% relief for assets above this amount.

The rates of CGT have already been increased, with the new rates of 18% and 24% coming into effect immediately after the Budget announcement. 

The proposed timeline of the changes provides plenty of time to consider your options and monitor the consultation period for any amendments. But one of the reasons there is a relatively lengthy transition period, is that the impact on your estate could be substantial.

As you can see from the table below, without the right plans in place your estate could potentially see a sizable increase in the IHT bill.

Often one of the most seemingly straightforward solutions to an IHT problem is to take out a Guaranteed Whole of Life insurance policy to cover the potential liability. Here, the sum assured would be calculated to be roughly equivalent to your expected IHT bill. The policy will then pay out this sum on death (either first death, or second death), and can be used by your beneficiaries to pay the outstanding liability to HMRC.

In addition to this, the proceeds can be paid into a trust, so that the sum is not included in your estate, and these funds can also be accessed immediately, meaning your executors would not have to sell any assets to pay the bill.

 When putting this cover in place, the insurance companies will ask for a ‘financial calculation’ of the potential liability, and, due to the change in legislation, at present, it may be difficult to insure a future liability. It remains to be seen whether insurance companies are prepared to offer a whole of life policy on the basis of a potential IHT increase in the future, which is not yet passed into law.

Our dilemma then becomes, do we take out cover now, based on the current liability, or do we risk waiting until April 2027? While you may be able to take a policy out in the future, your health could change over time, as could the availability of cover and there is always the possibility of an unexpected death. So, proper planning discussions means that you can have other options ‘on the table’.

The pension relief and BR and AR have allowed many people to limit or avoid IHT by maximising the proportion of their assets in pensions, private businesses or agricultural property. When these new proposals become law, there are many who will face an IHT liability where they didn’t before, or their existing tax bill could become much larger.

As a result, it is likely that strategies, such as income planning, need to change, and you might have to consider things like larger gifting, or the use of trusts for the first time.

These aren’t necessarily easy decisions to make. Gifting and the use of trusts could involve giving up control over some of your assets and bring into play family dynamics over ‘who gets what’.

Working with a financial planner can help you to gain clarity over the options you have and give you the time you need to consider the benefits, and drawbacks, of different strategies. I work closely with my clients on their cashflow modelling forecast, looking at the financial impact of different strategies and choices to help them visualise their potential outcomes.

Combined with detailed discussions on the emotive side of money (which we all know can be significant), the earlier you start, the more informed your choices can be. The important thing is not to make an immediate decision but also knowing that avoiding the issue until the legislation comes into effect could limit your options.

For example, the ‘gifts out of surplus income’ exemption can be a powerful tool to reduce IHT over time, but HMRC needs to see a consistent, long-term pattern for it to be an allowable relief.

These are just some of the issues I’m discussing with my clients right now, in addition to making sure their financial plan and investment strategy remains in line with their other goals and objectives.

While IHT planning is clearly important, ensuring your finances allows you to maximise your quality of life while you’re here is even more so. If you’d like to discuss your IHT situation, investment portfolio, overall financial plan, or any of the other changes proposed in the Autumn Budget speak to your usual Evelyn Partners contact.