‘I’m an inheritance tax expert – 6 crucial tips to protect your estate ahead of changes’

Britons are being urged to take steps now to protect their finances as stricter (IHT) rules loom.

At present, estates worth over £325,000 are taxed at 40%, a threshold known as the “nil-rate” band.

Despite soaring and inflation, this limit has been frozen since 2009, and the Chancellor has extended the freeze until 2030.

More major changes to inheritance tax rules are set to roll out from April 2026. Agricultural and Business Property Relief, which previously exempted certain assets entirely, will now only exempt the first £1million, while assets above this will face a reduced relief rate of 50%, effectively taxing them at 20%.

Additionally, AIM shares, previously fully exempt from IHT, will now be subject to a 20% tax rate if held for at least two years.

Looking further ahead, inherited may face both income tax and inheritance tax from April 2027, with an effective tax rate potentially as high as 67%, pending a consultation.

Ian Dyall, head of estate planning at wealth management firm , said: “Estate planning is about a lot more than just inheritance tax. It’s a peace-of-mind strategy to help families pass on wealth in the best way, one that meets as many of their needs and objectives as possible.”

Mr Dyall also warned that the changes could “really undermine” existing plans for transferring wealth, exposing families to “quite significant tax bills.”

He urged households to review their estate planning sooner rather than later, saying, “As we head into 2025, there’s an important opportunity for many households to look at their estate planning – not just through a tax lens but also thinking about what they want to do with their assets and what will end up being best for the family’s future.”

Make or check your Will(s)

Creating or updating a Will is a “huge step” in securing financial peace of mind, according to Mr Dyall. He said: “Especially if you can get your solicitor to work closely with a good financial planner.

“This can prevent unnecessary stress and even disputes for the administrators and beneficiaries of an estate and could save them having to pay unnecessary inheritance bills.”

Wills are particularly crucial for unmarried couples, as intestacy rules can lead to unintended asset distribution, and for blended families where disputes or misunderstandings often arise.

Mr Dyall explained: “For families with businesses or farms, the recent changes to business and agricultural property relief mean that traditional mirror Wills for married couples – leaving everything to each other and then to children – might no longer be the best strategy,”

He highlighted that the £1million Business Relief band is not transferable to a surviving spouse, potentially wasting tax benefits. Allocating assets to children or a trust on the first spouse’s death could result in “significant” tax savings.

Mr Dyall also emphasised the importance of regularly reviewing existing Wills to ensure they align with current wishes and new tax rules.

He added: “It’s also a good time to reflect on articulating your wishes at a time of lost capacity and possibly arrange lasting power of attorney (LPA).”

An LPA allows trusted individuals to act on your behalf if needed and can be registered in advance without immediate activation.

Gift or spend

With inheritance tax liabilities increasing, many estates may need to reconsider how they manage their wealth. Factors such as pensions becoming taxable assets, reduced reliefs, and rising asset values are pushing more estates above the nil-rate bands.

Mr Dyall noted that the residence nil-rate band may also erode if an estate’s value exceeds £2million. He said: “One perennial remedy for this is to spend more on yourself and your family or to give away more wealth during lifetime to shrink the estate so that less of it is taxable at death.

“Many older savers and investors find it difficult to switch from accumulating wealth to spending it or giving it away, so sometimes this can require a bit of a change of outlook.”

Gifting wealth is a common solution, but the .

However, Mr Dyall advised against making impulsive decisions in response to Budget changes, suggesting instead that families consider a longer-term gifting strategy.

He said: “Now is probably the time to think about a longer-term gifting plan rather than making ad hoc handouts, ideally with the assistance of professional advice.”

Get married?

Wealth transferred to a spouse or civil partner is exempt from inheritance tax (IHT), including pension pots. For many people, “this might only become an IHT ‘problem’ when they are the surviving spouse,” explained Mr Dyall.

For couples in long-term relationships who are unmarried, the issue can be more pressing. Mr Dyall noted: “It could well be that many older couples in long-term relationships decide to tie the knot to make this problem go away, for a certain timespan at least.”

He added that anyone who is married should check their pension death benefit nomination. He said: “After this rule change, it will be best for most couples’ IHT purposes to stipulate that the pension is paid in total to your spouse when you die, rather than any portion left to children or other family members.”

Couples should review how assets are owned and distributed

The recent Budget changes highlight the importance of couples reviewing how their assets are owned and distributed, particularly if they hold business or agricultural property or large pension pots set to become liable to inheritance tax (IHT).

Mr Dyall said: “Both husband and wife need to ensure that they use their allowances, particularly if they own business or agricultural assets, but even if they have a large pension which will be liable to IHT in a couple of years’ time.”

To preserve the residential nil-rate band, couples should aim to keep the surviving spouse’s estate below £2million on second death. This may involve strategies such as gifting assets up to the nil-rate band on the first death or skipping a generation with inheritances.

Mr Dyall added: “It might also mean trying to avoid bringing other assets into the estate like their own inheritances from parents. It can be tax-efficient to skip a generation and pass these straight on to grandchildren using a deed of variation.”

A pensions rethink

Upcoming changes to inheritance tax (IHT) rules mean retirees may need to reconsider how they manage their pension pots to avoid creating or worsening an IHT liability.

Mr Dyall warned: “Under current rules, the pension IHT change could mean that some pots are ‘double-taxed’ if the holder dies at age 75 or older, because then the beneficiary could also be charged income tax at their marginal rate as they withdraw funds from the pension that has already been subject to IHT at 40%.”

For higher-rate taxpayers, the combined impact could leave beneficiaries with as little as 33p in the pound from inherited pensions – an effective tax rate of 67%. Additionally, if pension savings push the estate value over £2million, the residence nil-rate band starts to erode, compounding tax burdens.

To mitigate these effects, retirees might consider drawing down their pension more rapidly around age 75, instead of relying on other assets. Some may also accelerate withdrawals of their 25% tax-free lump sum for spending or gifting, starting the seven-year clock for tax exemption.

Mr Dyall added that gifting from regular pension withdrawals could be a strategy, but cautioned: “If you are trying to use the excess income exemption, what you can’t do is take all your tax-free cash, stick it in a bank account and gift it gradually from there, as then it will be seen as a gift from capital and not from income.”

Insure your IHT liability

For those who are looking at substantial IHT liabilities after pensions are included in estates, taking out whole of life cover can be an “efficient way” of insuring your inheritance tax liability, so beneficiaries do not have to pay it themselves, Mr Dyall said.

He explained: “You can take out a life insurance policy for all or part of the estimated IHT bill and crucially, have it written into trust so the eventual payout does not form part of your estate for tax purposes.

“You pay the monthly premiums and when you die the trustees (your beneficiaries) can use the proceeds to promptly settle the IHT bill.”