Keep it in the family with smart tax planning

With careful planning, you can reduce the tax burden on your estate through strategies like gifting, trusts and making use of allowances. While this may seem complicated, our financial advisers are able to help you work through the options.

There’s no cost to meet with one of our advisers or to talk through your goals. You’ll only pay a fee if you decide to go ahead with the recommendations in your personalised financial plan. There’s no obligation to proceed, and if you do, your adviser will explain all costs clearly before you make any decisions.

Not only do we aim to help you, but we also welcome family members to attend financial planning meetings so that the next generation is aware of wealth transfer wishes. This approach may help simplify the process, providing clarity and peace of mind during what can be a challenging time. 

However, for some clients, financial planning is a private affair and our advisers are on hand to support you regardless of how you want to engage.

An estate is the total value of a deceased person’s possessions including property, vehicles, businesses, bank accounts, debts, investments, non-exempt gifts, digital and other assets. From April 2027, any remaining pension funds may also be considered part of your estate and subject to IHT.

If your estate is worth more than £325,000, your beneficiaries could pay 40% IHT on the excess without any financial planning advice. 

This can be reduced if your home is left to direct descendants, such as children or grandchildren, through two tax-free allowances: 

• £325,000: The standard IHT allowance, and
• £175,000: The residence nil-rate band, available when passing your home to direct descendants

If you leave your estate to a spouse or civil partner, no IHT will be charged, and any unused IHT allowances can be transferred, allowing couples to potentially pass on up to £1 million tax-free.

Effective inheritance planning could help reduce your estate’s tax liability, with the key steps being to create or update your will. Your will is a living document and should be reviewed every few years or whenever there is a change in your life, such as a divorce, or the addition of grandchildren.

By working with an adviser, you could maximise tax allowances and potentially minimise the IHT burden on your loved ones. Everyone’s situation is different, and tax rules do change. That’s why your adviser will look at your personal circumstances and talk you through how the current tax rules apply to you, so you can make informed choices.

Trusts are a powerful tool in inheritance tax planning. They allow you to set aside assets for beneficiaries, potentially reducing the value of your estate and the IHT liability. Setting up a trust can be complex, and it's important to get professional advice to ensure it's done correctly and in a way that seeks to maximise the tax benefits.

Under current rules, pensions usually sit outside your estate for inheritance tax (IHT) purposes. However, following changes announced in the October 2024 Budget and now written into law, most unused defined contribution pension pots will be brought into the scope of IHT for deaths on or after 6 April 2027.

The income tax treatment of pensions on death is not changing. If you die before age 75, your pension can normally be passed on free of income tax, and beneficiaries can withdraw from it without paying tax. If you die at age 75 or over, beneficiaries will pay income tax on withdrawals at their own marginal rate.

Although nominating a beneficiary will not reduce any tax that may be due, it is still important to complete an expression of wish form for each pension you have. This helps pension providers pay benefits promptly and to the right people, rather than relying on your will.

• Defined contribution pensions
  A defined contribution pension can usually be passed on tax-free to a nominated beneficiary if you pass away before aged 75. Whereas if you die aged 75 or over, your beneficiaries will normally pay income tax at their marginal tax rate on withdrawals from your pension if they draw benefits.

  In cases where a single life annuity was bought, this will stop paying upon your death, even if it hasn’t paid out the equivalent of what you bought it for. However, a joint life annuity or a single or joint annuity with a guaranteed period will continue payments to a named beneficiary based on the guarantee period selected at outset. This only applied when some or all of the pension funds have been used to purchase an annuity.

   

• Defined benefit pensions
  As defined benefit pensions provide a guaranteed income at retirement based on your final pay or average salary, if you die before reaching retirement, the scheme will usually pay out a lump sum – typically two or three times your salary - to your spouse of civil partner. This amount may vary from scheme to scheme so it’s important that you check with your provider.

  After reaching the scheme’s pension age, it may also provide a reduced income to your spouse or civil partner, typically around 50% of what you would have received.

To minimise inheritance tax, you could consider giving aways assets while you are still alive. You can gift up to £3,000 each tax year without it counting towards your estate. 

You can also carry any unused gift allowance  forward to the next tax year. It can only roll over into the subsequent year, it does not accumulate over multiple years. This means that as a couple, you can typically gift £6,000, and potentially £12,000, if no large gifts were made the previous year.

Similarly, small gifts of up to £250 each tax year can be made, free of IHT, to anyone who hasn’t already received part of your £3,000 annual exemption.

Gifting assets can be an effective way to support your family and reduce your estate size. However, gifts made within seven years of your death to anyone other than your spouse will typically be included in your estate for inheritance tax purposes.

A Whole of Life (WOL) insurance policy can help cover the inheritance tax liability on your estate. This policy pays out a lump sum upon death, which can be used to settle the IHT bill, ensuring your beneficiaries don't have to sell assets to cover it.

Such a policy offers several benefits for covering IHT liability. The lump sum from the WOL policy provides immediate funds to pay the IHT liability, preventing the need for your beneficiaries to liquidate other assets or withdraw pension funds in a potentially tax-inefficient manner. Additionally, these policies can be tailored to meet your specific needs, including options for guaranteed premiums and inflation-linked increases to ensure the cover remains adequate over time.

For individuals, a Single Life Plan can be written under trust for the benefit of the intended beneficiaries. For couples, a Joint Life Second Death Policy ensures that the lump sum is paid out upon the death of the second partner, providing funds to cover the IHT liability on the combined estate.

It’s worth remembering that protection policies don’t build up a cash value. If premiums aren’t kept up, the cover will stop and the policy will end without a payout. And if you reach the end of the policy term without needing to claim, the cover simply comes to an end with no payout.

Individual Savings Accounts (ISAs) left to your spouse or civil partner are exempt from IHT, but if left to someone else, IHT may apply depending on your estate’s value. 

When you die, your spouse automatically inherits a one-off additional ISA allowance, known as the Additional Permitted Subscription (APS). The allowance is equal to the value of your ISA at death or when it closed – whichever is higher – and won’t affect their own ISA limit. 

Since 2018, all ISAs – except Junior ISAs – automatically become a ‘continuing account of a deceased investor’, which allows any growth to remain tax-free. For example, if an ISA’s savings aren’t transferred to the spouse for three months and earn £300 in interest, the interest is included as part of the additional subscription.

Our financial advisers could help to guide you through all of these strategies. Their expertise ensures proactive planning, helping to preserve more of your wealth helping to minimise financial strain on your loved ones.

This article is for information purposes only. It is not intended as investment advice.

The value of investments and the income from them can fall as well as rise and are not guaranteed. You might not get back your initial investment.

Lloyds Wealth does not provide will writing or estate administration services, however we can introduce you to a relevant specialist. We may receive a referral fee from some of the specialists we introduce you to.

The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn't guaranteed and can do down as well as up. The benefits of your plan could fall below the amount(s) paid in.