Passing It On: Smart Strategies for Inheritance Tax Planning

Last week, I attended an event hosted by the Financial Times titled “Creating and Maintaining a Resilient Financial Plan.” It brought together some of the UK’s leading minds in wealth and personal finance. What stood out most wasn't the speakers but the audience's pressing concerns.

During the Q&A session, the most frequently asked question wasn't about inflation, interest rates, or investing in AI. It was:

“How do I pass on my wealth to my children tax efficiently?”

This question resonates now more than ever, especially with significant changes on the horizon. Starting April 6, 2027, most unused pension funds and death benefits will be included in the value of your estate for inheritance tax purposes. This means that pensions, once a tax-efficient means of transferring wealth, will now be subject to a 40% tax if your estate exceeds the nil-rate band .

The implications are substantial. Estimates suggest that 10,500 estates will become liable for inheritance tax for the first time due to this change, and about 38,500 estates will pay an average of £34,000 more in inheritance tax annually .

Given these developments, it's crucial to reassess your financial plans to ensure your legacy is preserved for your loved ones.

Why Inheritance Tax Planning Matters More Than Ever

For years, many assumed that inheritance tax (IHT) was only a concern for the very wealthy. But that’s no longer the case.

The threshold at which IHT kicks in — known as the nil-rate band — has been frozen at £325,000 since 2009, and it will remain frozen until at least 2028. Meanwhile, property prices and investment portfolios have continued to rise. The result? More and more ordinary families are being caught by a tax that was originally aimed at the affluent few.

Add to that the upcoming 2027 changes — where unused pensions will be pulled into the taxable estate — and the IHT net is tightening further.

HMRC collected over £7.5 billion in inheritance tax in the last tax year, and this figure is set to rise sharply. Without proper planning, a significant portion of your estate could be lost to tax — reducing what you’re able to pass on to the next generation.

Common Myths & Misconceptions

Inheritance Tax (IHT) is often misunderstood, leading many to overlook essential planning opportunities. Let's address some common misconceptions:

Myth 1: "Gifts are always tax-free."

Not all gifts are exempt from IHT. While there are annual allowances (e.g., £3,000 per year) and exemptions for small gifts, larger gifts may be subject to the "7-year rule," where the gift becomes exempt only if the donor survives for seven years after making it.

Myth 2: "My spouse will sort it out later."

Relying solely on a spouse to manage IHT matters can be risky. Without proper planning, the surviving spouse may face unexpected tax liabilities, especially if the estate's value increases over time.

Myth 3: "Trusts are only for the super-rich."

Trusts can be valuable tools for a wide range of individuals, not just the wealthy. They can help manage assets, provide for beneficiaries, and potentially reduce IHT liabilities when set up correctly.

Myth 4: "I can deal with this later."

Delaying IHT planning can limit available options and increase tax liabilities. Early and proactive planning allows for more strategies to be employed, potentially reducing the IHT burden on your estate.

Understanding these misconceptions is the first step toward effective estate planning. In the next section, we'll explore actionable strategies to mitigate IHT liabilities and ensure your wealth is passed on efficiently.

Core IHT Planning Strategies

Once you understand the risks, the next step is to put a plan in place. The good news? There are several effective and completely legal strategies that can help you pass on more of your wealth to loved ones — not HMRC.

Here are some of the most widely used approaches:

1. Use Your Gift Allowances

Every individual can gift up to £3,000 per tax year completely free of IHT. You can also give up to £250 to as many people as you like annually (provided they haven't already received the £3,000). Gifts for weddings and to help with living costs (such as supporting a child or elderly relative) can also be exempt.

2. The Seven-Year Rule

Larger gifts are classed as Potentially Exempt Transfers (PETs). If you survive for seven years after making the gift, it falls outside of your estate for IHT purposes. If you pass away sooner, taper relief may apply — reducing the IHT due depending on how many years have passed.

3. Gifting Surplus Income

If you regularly have income that exceeds your living expenses, you can make tax-free gifts from this surplus — without needing to survive seven years. However, this must be carefully documented to qualify.

4. Make Use of Pensions (Before 2027)

For now, pensions remain outside the estate for IHT purposes, making them a powerful tool for wealth transfer. However, with this benefit being removed from April 2027, it’s worth reviewing how your pension fits into your overall estate plan.

5. Consider Trusts

Trusts can help manage family wealth across generations. They allow you to retain some control while potentially removing assets from your estate. Different types of trusts have different tax treatments, so tailored advice is essential.

6. Business Relief (BR) & AIM Shares

Certain investments — like shares in qualifying AIM-listed companies — may qualify for 100% relief from IHT after just two years. This can be a powerful option for experienced investors with higher risk tolerance.

7. Take Out Life Insurance

Some choose to take out a life insurance policy to cover the expected IHT bill — written in trust so that it pays out outside of the estate. This ensures your beneficiaries can settle the tax without selling assets.

8. Review Your Will & Beneficiaries

An out-of-date will can lead to unnecessary tax or confusion. Make sure yours reflects your current wishes, and double-check the beneficiaries listed on your pensions and life policies — these typically sit outside the will.

Inheritance tax is complex, but with the right planning — and early action — it’s possible to significantly reduce the burden on your loved ones.

How We Can Help

Inheritance tax planning isn’t just about saving money — it’s about making sure the wealth you’ve worked hard to build goes where you want it to. It’s about protecting your family, supporting the next generation, and avoiding unnecessary stress down the line.

At K2 Private Wealth, we work closely with individuals and families to create bespoke estate planning strategies. That includes:

• Exploring the use of trusts and tax-efficient investments

  
  

• Reviewing your existing will, pension nominations, and life policies

  
  

• Identifying gifting opportunities and calculating potential savings

  
  

• Creating clear, actionable plans that evolve with you

Whether you’re just starting to think about passing on wealth, or want a second opinion on an existing plan, we’re here to help.