While Inheritance Tax (IHT) was originally aimed at the very wealthy, nowadays you don’t need to be rich to have a potential liability. According to Money Marketing, the Government could take £9.1 billion in IHT receipts in 2025/26, up from £8.2 billion in 2024/25.
Furthermore, this figure could soar when pensions become liable to the tax from April 2027. Indeed, the article suggests the Treasury could take more than £14 billion in IHT by 2029/30, which would be a substantial increase.
With all this in mind, you might be looking for ways to reduce your estate’s potential exposure to the tax so that more of your wealth goes to your loved ones. If so, working with a financial adviser could be a wise decision. Read on to discover three important reasons why.
1. Help you understand the changing pension rules
In October 2024 the Chancellor, Rachel Reeves, announced that from April 2027 the unused portion of a pension pot will be included when calculating an estate’s exposure to Inheritance Tax (IHT).
As pensions can be one of the biggest assets a household has, the fact they will become liable to IHT means your estate’s tax liability could skyrocket. According to Pensions Age, in 2027/28 the average IHT charge would increase by £34,000 as a result of including pensions in the value of estates.
Furthermore, as you will no longer be able to pass your pension on to loved ones IHT-free after April 2027, mitigating your estate’s exposure to the tax could be an even more of a challenge than it was before.
There is some good news though, as working with a financial adviser could help you to mitigate your liability so that you can leave more of your assets to your loved ones.
2. Avoid a potentially costly mistake
As the rules around IHT are complex, it’s all too easy to inadvertently fall foul of them. If you do, your family or other beneficiaries may be liable to a substantial IHT tax charge they weren’t expecting.
One example of a commonly made mistake involves the gifting of homes. If you gift your home to a beneficiary, it will typically be classed as a Potentially Exempt Transfer (PET), which means it will only fall outside of your estate for IHT purposes if you subsequently live for seven years.
That said, if you are still considering gifting your home, you need to be aware of the ‘gifts with reservation of benefit’ rule. Under this little-known regulation, if you continue to benefit from a gift, it will not count as a PET and will still be liable to IHT, even if you survive for seven years.
This means that if you benefit by living in the property, even if you’ve gone through the relevant channels and passed ownership to your beneficiaries, your home will still be subject to an IHT tax charge. Paying full market rent to the individual you have gifted your home to, however, means you may be able to avoid the rule. If you gift a buy-to-let property to a beneficiary but you continue to receive rental income from it, the rule will also apply.
This is something that landlords can get wrong, meaning their gift still becomes liable to IHT. Working with a financial adviser could help you sidestep this mistake.
3. Provide alternative ways to deal with an IHT liability
While gifting can be an extremely effective way of reducing or negating an estate’s exposure to IHT, it may not be right for everyone. For example, if you:
- have a limited life expectancy that means you’re less likely to survive seven years
- want to keep control of your assets, instead of giving up your right to do so when you gift your wealth
- would rather maintain your wealth so that you can cover long-term care costs if necessary.
One way you may be able to deal with an IHT liability, while retaining your wealth, is to consider using life cover. This pays out a tax-free lump sum on death, which can then be used by those dealing with your estate to settle an IHT liability.
As this means the tax charge has been settled without using assets from your estate, you’re likely to leave more of your money to beneficiaries. In addition to this, life cover could reduce the time it takes for beneficiaries to receive their inheritance, as the money from an estate cannot be released until the IHT is paid.
As life cover is usually paid within weeks, your loved ones could receive their inheritance much more quickly.
It’s important to note that the cover should be written in trust, as this means the payout will not form part of your estate. With no trust in place, a life cover payout will increase the value of your estate, which in turn, means it could face an even greater exposure to IHT.
Working with a financial adviser could help ensure life cover is set up in the most appropriate and cost-effective way. This provides peace of mind that your wealth will be passed to your loved ones as smoothly as possible, which will help to reduce stress for them at a particularly challenging time.
Join our insightful webinar
On Tuesday 16 September, AFH will be hosting the next in its series of easy-to-understand webinars, which will be answering viewers’ questions on Inheritance Tax, a subject that has been highly requested by previous attendees.
We’ll be answering a wide range of questions on Inheritance Tax, which will include:
- the implications of pensions becoming liable to the tax
- using gifts as effectively as possible
- intergenerational wealth planning
Former BBC presenter, Mark Foster, will be joined once again by AFH’s Chief Advice Officer, Austin Broad. For this insightful webinar, both will be joined by Independent Financial Adviser for AFH, Steph McMahon.
To register for the webinar, which promises to be as engaging as it interesting, click here.
Webinar Agenda
- What Inheritance Tax is and how it works
- How pensions will be treated for Inheritance Tax after April 2027
- Common Inheritance Tax trapdoors and how to avoid them
- How businesses are treated for Inheritance Tax
- Reducing your Inheritance Tax exposure
Get in touch
If you would like to discuss how you might be able to mitigate, or even negate, your estate’s exposure to IHT, please call us on 0333 010 0008. We would be happy to arrange a no obligation initial meeting with one of our independent financial advisers.
10 September 2025