Inheritance Tax Changes - Time to Revisit Your Strategy

For many years, pensions and other tax efficient portfolios have played a central role in inheritance tax (IHT) planning. With recent changes to IHT and more due in 2027, those who have relied heavily on tax efficient portfolios as key to their IHT strategy may now need to reconsider their approach.

From April 2027, most unused pension funds will form part of an individual’s estate for IHT purposes. This represents a clear change from the long-standing position where pensions typically sat outside the estate. 

As a result, unspent pension funds could be subject to IHT at 40%, reducing their effectiveness as a vehicle for passing on wealth. 

This change is particularly important for those over 57 because it may influence when and how pension benefits are taken. There are a wide range of options and the most tax-efficient route during someone’s lifetime and after their death needs careful consideration.

Individuals with an IHT liability who have previously planned to retain pensions for beneficiaries will need to revisit that strategy. In some cases, it may be sensible to spend or gift pension funds more actively during lifetime and preserve other assets (such as cash or investments held personally).

Advice is often needed to decide how withdrawals should be structured, the pace of withdrawals, use of tax allowances and tax bands, and the interaction with other income sources. This is rarely a one-off decision: but an ongoing strategy that should be reviewed as legislation, investment markets, personal circumstances and estate values change.

Now is also a sensible time to revisit any death benefit nomination (often called an expression of wish) attached to pension arrangements. Pension death benefits are not typically distributed through a will. Ensuring nominations remain up to date and reflect current intentions can help align pension wealth with the broader estate plan.

AIM investments have often been used as a shorter-term IHT planning solution, benefiting from 100% Business Relief after two years.

From 6 April 2026, this relief reduces to 50%. In practical terms, this could mean an effective IHT rate of 20% on these portfolios, prompting a reassessment of whether the level of investment risk remains justified.

AIM portfolios are high risk investments and not suitable for many investors.

From April 2026, Business Relief and Agricultural Relief will be subject to a combined £2.5 million allowance.

• The first £2.5 million of qualifying assets will continue to receive 100% relief.
• Any value above this threshold will receive relief at 50%. 

For couples, this allowance can be combined, allowing up to £5 million to pass free of IHT. Despite this, the changes represent a meaningful shift for business owners and farming families

With several established planning routes becoming less effective, this is a natural point to review existing arrangements. 

There remains a range of options available. Trust planning, lifetime gifting, structuring of business interests, and revisiting pension and investment strategies can all play a role in building an effective approach under the new rules. 

As always, the right solution will depend on individual circumstances. A structured review with a financial adviser can help ensure plans remain aligned with both current legislation and long-term objectives.

Please be aware, the Financial Conduct Authority does not regulate estate planning or trusts.