By Ian Dempsey on behalf of UK-lifeinsurance.com
This trend is evident among clients over 50 who are rethinking long-established estate plans in light of pension tax shifts, requiring complex planning with tax advisers. In the last nine months since the Autumn budget, I’ve had a number of unsettled clients come to me asking for advice on navigating these changes, with life insurance being a strategy that has worked for many alongside deeper tax planning strategies but can also be a simple solution when needed.
What’s Changed? And Why It Matters
At the autumn Budget last year. Chancellor Rachel Reeves announced reforms to agricultural property relief and business property relief. Furthermore, private pensions will become part of a person’s estate and subject to inheritance tax from April 2027, further encouraging individuals to use life insurance policies in trusts to avoid a large inheritance tax bill for their loved ones. Pensions were never meant to be used for IHT planning but they worked for people as a way to pass down wealth and avoid paying tax on withdrawals. But these changes mean the potential implications are huge for anyone dying after 75 and passing pensions to loved ones. This move alone has made years of previous estate planning partially obsolete for many High Net Worth families. Clients who’ve spent tens of thousands on tax advice are now back at the drawing board, with a big planning bill and left scratching their heads.
The freezing of the nil rate bands has effectively also been a stealth tax since April 2009 and will remain in place until 2030. This will affect a lot more people and not just the HNW space. The average house price in the South East according to Plum is £442,000 and it’s estimated that married couples would have circa £300,000 in pensions at retirement in 2025; fine for now and under the £1m when you factor in the residential nil rate band. If you then look to 2030, average property prices could hit £700,000 and two pensions could total £440k and now your estate could have a tax bill with fairly modest growth if the nil rate band remains at £325,000 and the residential nil rate band at £175,000. We are not talking lavish or extravagant lifestyles at this level either.
The HNW Dilemma: Legacy vs Liability
With new changes in legislation, business owners and landowners may find their assets, previously shielded, are now fully taxable upon death. Many are realising that liquidity is paramount when facing IHT bills. Life insurance can provide an immediate financial buffer, with no real limits on coverage as long as terms and conditions are met. Without proactive planning, families risk being forced to sell assets at a discount to cover these taxes. A savvy strategy some clients are employing, though not universally available, is running part of the insurance cost through their businesses.
Why Life Insurance in Trust Works
Writing life insurance in trusts offers significant advantages. It removes the proceeds from the estate, eliminating Inheritance Tax liability on the payout and providing heirs with immediate funds to settle HMRC debts without needing to access the estate. This structure also bypasses probate delays, ensuring a swift and clean distribution of funds to beneficiaries. Policies can be precisely aligned with anticipated IHT obligations and can be adjusted as circumstances change. For many, this represents the most effective method to protect family assets without disrupting long-term financial strategies.
Why Age and Timing Matter
While premiums become significantly steeper with age, particularly for those in their 50s and beyond where it represents a significant investment, younger clients have a unique opportunity to secure manageable premiums. This early adoption allows them to build in cover while costs are still affordable, a window that will inevitably close. Unfortunately, for some, it's already too late, with prohibitive costs making cover out of reach, leaving them confused and potentially impacting their estate financially.
What Happens Next?
The market is expected to adapt, with providers innovating and new structures emerging, leading to another evolution of planning. Currently, however, we are in a transitional phase where the situation remains unsettled. Clients require clear and confident guidance, not only on tax but also on practical next steps. Planning plays a crucial role in this process; initiating it early can yield life-changing benefits, while delaying it can prove very costly. There is no "one-size-fits-all" solution; planning must be tailored to the individual. It is essential to have a trusted advisor who can objectively assess the broader situation, free from emotional influence.
The Risks of Doing Nothing
IHT bills are due within six months of death, and HMRC will not wait. Without sufficient liquidity, loved ones may be forced to make difficult decisions, such as selling property, businesses, or even the family home, or taking out loans to cover the costs. Even those with substantial wealth can inadvertently leave a significant financial burden for their beneficiaries if a life policy is not held in trust. Inheritance tax planning is no longer solely for the ultra-wealthy; it's becoming an essential consideration for anyone with £1m+ in assets, a group that is rapidly expanding. The clients that I have dealt with recently, for example, are not lottery winners, but people who have grown their estate value over the long term through their house value increasing, hard graft, their pensions and other assets.
The rules surrounding inheritance tax are constantly shifting, and if your estate plan hasn't been reviewed recently, you're already at a disadvantage. While you might be currently compliant, it's crucial to reassess, especially given the potential 40% tax rate. For many, this isn't about avoiding tax but about protecting loved ones and making proactive decisions. While life cover in trust may not be the ultimate solution for every scenario, for a significant number of individuals, it represents the most advantageous immediate step. With these rules in place and the tax burdens expected to increase at the next Budget, I expect to see more people utilise life insurance policies to help plan their estate in the coming months.
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