Passing Down Your Wealth: Inheritance Tax Planning for Families

If you're thinking about how to pass down your wealth tax efficiently, you're not alone. With changes to inheritance tax (IHT) on the horizon, more families are asking how to protect what they've built and reduce the amount of tax their loved ones may have to pay.

For many people, a pension is one of their largest assets. However, from 6 April 2027, proposed changes mean most pension funds are expected to form part of an estate for inheritance tax (IHT) purposes*. As a result, inheritance tax planning is becoming increasingly important for more families, not just the very wealthy.

While the rules are still being finalised, now is a good opportunity to review your plans.

Why Inheritance Tax Planning Matters

Good IHT planning isn't about avoiding tax altogether. It's about making informed decisions, so your wealth passes to the people you choose as tax efficiently as possible.

Starting early can often give you more options and help ensure your plans still reflect your wishes.

Start with the Basics

Before looking at ways to reduce inheritance tax, make sure the essentials are in place:

• Is your Will up to date?
• Have you completed an Expression of Wishes for your pension?
• Are any life insurance policies written in trust?
• Have you considered how your wealth will pass to your spouse, children or grandchildren?

These simple steps form the foundation of good estate planning.

Could Inheritance Tax Affect Your Family?

Everyone currently has a £325,000 Nil Rate Band, while married couples and civil partners can usually combine their allowances. If you leave your home to direct descendants, you may also qualify for the Residence Nil Rate Band, meaning some couples can pass on estates worth up to £1 million before inheritance tax applies.

Anything above the available allowances is generally taxed at 40%.

Understanding your available allowances is an important first step in reducing a potential inheritance tax bill.

How Can You Reduce Inheritance Tax?

One of the most common questions people ask is, "How can I reduce inheritance tax?"

There is rarely a single solution. Instead, effective inheritance tax planning often involves reviewing your overall estate and making the most of the options available to you.

Depending on your circumstances, these could include:

• Making use of gifting allowances.
• Passing on surplus income during your lifetime.
• Reviewing pension nominations.
• Ensuring life insurance is structured appropriately.
• Considering whether trusts could support your estate planning.

The right approach depends on your financial situation, family circumstances and long-term objectives.

Are Trusts Worth It?

Another common question is, "Are trusts worth it for inheritance tax planning?"

Trusts can be an effective way to protect family wealth, control how assets are passed on and, in some circumstances, improve inheritance tax efficiency.

However, trusts don't automatically reduce inheritance tax and they aren't suitable for everyone. They come with their own legal and tax rules, so it's important to understand whether they're appropriate for your circumstances before putting one in place.

Review Your Plans Regularly

Tax rules change, family circumstances evolve and the value of your estate can grow over time. That's why estate planning should be reviewed regularly rather than left until later.

Whether you're concerned about the proposed inheritance tax changes to pensions, wondering how to reduce inheritance tax, or considering whether trusts are worthwhile, taking advice early can help you understand your options and make informed decisions.

*Proposed legislation is subject to change and the impact will depend on your individual circumstances.

Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.   

Will writing involves the referral to a service that is separate and distinct to those offered by St. James's Place. Wills are not regulated by the Financial Conduct Authority.