The budget. Speculation, the delivery, the fervour in the immediate aftermath, the analysis of the detail, the what to do now.  Regardless of whether it’s a budget that contains the highest level of tax increases ever announced in a budget or is a more mundane affair, from a financial planner’s perspective, the process is the same each year. 

Admittedly though, if you’re focused on estate planning, there’s a fair bit to consider this time around.  The 170 page budget document confirms:

• “The government is making the inheritance tax system fairer by applying inheritance tax to unspent pensions pots and restricting the generosity of agricultural property relief and business property relief for the wealthiest estates.” And;
• “The government is removing the outdated concept of domicile status from the tax system and replacing it with a new internationally competitive residence-based regime from 6 April 2025. This includes ending the use of offshore trusts to shelter assets from Inheritance Tax.”

I’ve considered how these changes impact on possible planning strategies.

Pensions

The forecasts show that bringing pensions within the scope of inheritance tax could raise £640m, £1,340m and £1,460m in 2027/28, 2028/29 and 2029/30 respectively.  I’m no actuary but I’ve calculated many pension plan holders will be impacted!  According to the official document, 8% of estates will be affected.  It’s easy to see why.  From April 2027, anyone with pensions worth £325,000 could have a potential Inheritance Tax liability – and that’s before allowing for ownership of any non-pension assets. 

Agricultural property relief and business property relief

The reform of agricultural property relief and business property relief is predicted to affect just 0.3% of estates each year.  From April 2026, the 100% rate of relief will only apply to the first £1 million of combined agricultural and business assets and will reduce to 50% thereafter (in addition to the existing nil rate bands).  The rate of relief applicable to “shares designated as “not listed” on the markets of a recognised stock exchange, such as AIM” will reduce to 50% in all cases. Many family business owners and generational farmers will be faced with difficult decisions over potential inheritance tax liabilities that don’t exist under current legislation.

Planning options

Regardless of whether a potential inheritance tax liability has materialised or increased as a result of either change, there are some similarities for those wishing to protect wealth for their heirs.  One of the more straight forward inheritance tax planning strategies might be off the cards.  Lifetime gifting probably isn’t going to cut it.

For those pension holders under the normal minimum pension age, the pension benefits can’t be accessed to facilitate any gifting..  For farmers or business owners deriving an income from their asset, contemplating gifts may not be possible unless the income is more than they need.  Additionally, there’s more to consider than just inheritance tax.  Let’s not forget longer term asset protection and intergenerational planning.  A gift to an individual might protect the wealth from inheritance tax if the gift is survived by seven years but it exposes it to other financial threats.  What if the recipient of the gift gets divorced or is declared bankrupt? The financial implications of that could be greater than the 40% inheritance tax the gift sought to mitigate.  Additionally, the inheritance tax liability has potentially just been moved to another individual, depending on the amounts involved and the recipient’s own assets.

Rather than dwell on what might not be possible, let’s focus on what might be viable.

Back to basics

Time to consider one of the other more straight forward inheritance tax planning strategies.  Forget trying to mitigate the inheritance tax and instead focus on producing a fund from which to settle it.  Life assurance, structured appropriately and with due consideration given to the tax efficient payment of the premiums, may ensure the heirs benefit from the full asset value whilst also keeping HMRC happy.  In the case of asset rich, cash poor businesses or farms, this may also help alleviate the cashflow concerns. Even spreading the payment of inheritance tax over a ten year period, confirmed as an option in the budget , will cause issues in some scenarios, particularly when allowing for the associated interest charges.

Under current legislation, the life of a discretionary trust can be up to 125 years.  The extent that they are used for gifts during lifetime is limited by the potential for entry charges.  Where an asset is left to trust in a Will, no such entry charge applies.  Addressing an inheritance tax liability with life cover subsequently allows the potential for the future use of discretionary trusts, providing asset protection for several generations.

The non doms (soon to be an obsolete term)

If you want to delve into the detail, there’s a 34 page technical note “Reforming the taxation of non-UK domiciled individuals” available at www.Gov.uk.

I’m focusing specifically on inheritance tax so, cutting through all of the complexities about time spent in the UK, the Temporary Repatriation Facility (TFF – plenty of jargon to get used to) and the four year Foreign Income and Gains (FIG) regime, I see two distinct categories of individuals.  Those who have previously implemented estate planning and those who have not.

Put simply, those who have not, now have fewer planning options available to them than they did before the budget but, as a minimum, do have the same options as any other UK resident individual.  At the more complex end of the scale are those who have previously implemented planning – most commonly – excluded property trusts.

Relevant property regime

The technical note confirms “Where excluded property was comprised in a settlement immediately before 30 October 2024, this will not be subject to charges under the gift with reservation provisions or certain charges under the qualifying interest in possession regime as is currently the case. However, excluded property which was comprised in a settlement immediately before 30 October 2024 will be subject to charges under the relevant property regime (where applicable) from 6 April 2025.”

Relevant property regime – already complicated (by HMRC’s own admission) and even more so when noting that a settlor ceasing to satisfy the long-term residence test will cause non UK relevant property to become excluded property.  That will potentially trigger an exit charge (which could occur some time after the individual leaves the UK.)

It’s important to remember here that the relevant property regime has applied to trusts settled by UK domiciled and deemed domiciled individuals for years.  A tax liability at the 10 year anniversary, or on an exit, does not signal that the trust-based planning has failed.  I prefer to view it as the cost of the asset protection that the trust has provided.  At a maximum of 6% of the trust value every ten years, it’s not an extravagant form of insurance.

Obviously these are only some high level thoughts and any planning strategy needs to be tailored to meet an individual client’s bespoke needs.  We’re also delving deeper into the impacts on investment planning and pension planning.  Considering the holistic position is key.

If you would like to discuss how Adeptli can help you support your clients as you adapt their individual planning strategies to the changing legislative landscape, please get in touch by emailing hello@adeptli.co.uk or booking in a meeting with me.

Up Next: Why not read our article The FCA’s Wake-Up Call to Financial Firms: Are You Prepared?