How a financial planner can help your clients review their estate plan after crucial Budget changes

There are several reasons why your clients might want to create a financial plan. For many, it’s about building wealth to fund their retirement, and they might want to financially support their loved ones too. Clients may also want to make important decisions about what happens to their estate when they’re gone.

Passing wealth to the next generation could give their loved ones a head start towards their own goals and give clients peace of mind knowing the people they care about are looked after.

When creating their estate plan, it’s important for clients to consider the Inheritance Tax (IHT) their family could pay. By reducing the tax liability, they may be able to leave a larger portion of their estate to their beneficiaries.

Unfortunately, this could be more difficult in the future in light of potential changes announced in the October 2024 Budget.

Read on to learn more.

The chancellor announced plans to potentially end the Inheritance Tax exemption for pensions from April 2027

When your clients pass away, the executor of their will adds up the total value of all taxable assets to determine whether any IHT is due.

In 2024/25, your clients can pass on up to £325,000 without IHT. This is their “nil-rate band”. They may also benefit from up to an additional £175,000 “residence nil-rate band” when passing their main home to a direct descendant such as a child or grandchild.

Additionally, they can pass their entire estate to a spouse or civil partner without IHT. Their partner also inherits their unused nil-rate bands meaning that, as a couple, they could pass on up to £1 million between them.

Any portion of their estate that exceeds the nil-rate bands may be subject to 40% IHT.

Crucially, pensions are exempt from IHT, so any remaining funds won’t be considered during the calculations. Currently, this gives your clients an opportunity to use their pensions to pass more wealth to their loved ones tax-efficiently.

However, in her October 2024 Budget, chancellor Rachel Reeves suggested the exemption for pensions should end from April 2027 onwards. As a result, your clients’ pensions may be subject to IHT in the future.

Fortunately, we can help them review their estate plan and pass as much wealth as possible to their loved ones, despite any upcoming changes to IHT rules.

We can help your clients gift wealth while they’re alive to reduce Inheritance Tax

Passing wealth to their loved ones while alive could be an effective way for your clients to mitigate IHT.

Any wealth that they gift falls outside of their estate provided they survive for seven years after making the gift. Additionally, the first £3,000 they pass on each year automatically falls outside of their estate, without the need to wait for seven years. This is their “annual exemption”.

Your clients could use this exemption to regularly pass lump sums to their family without IHT. What’s more, these gifts might be useful for their beneficiaries now if they’re trying to reach certain financial milestones such as buying their first home.

Additionally, the “small gifts rule” allows your clients to give up to £250 to as many people as they like, provided they haven’t used any other gifting exemptions on them.

Your clients may also benefit from the “gifts from surplus income” rule. Under this rule, any gifts are automatically exempt from IHT if they:

Are regular
Come from income rather than capital
Don’t affect your client’s lifestyle, or in other words, come from “surplus income”.

We can help your clients review their budget and take advantage of these gifting rules, so they can potentially reduce the IHT their family pays.

Your clients may need to consider the tax they pay when drawing funds from their pension

If your clients want to pass on wealth while they’re alive, they might decide to draw more from their pensions to gift to loved ones. If they do this, it’s important for them to consider the tax they might pay.

They can usually draw the first 25% of their pension as a tax-free commencement lump sum, up to the Lump Sum Allowance (LSA). This stands at £268,275 in 2024/25. The 25% tax-free portion can be taken as a single sum or in several instalments.

Any withdrawals from the remaining 75% of their pension that exceed their Personal Allowance – £12,570 in 2024/25 – will be taxed at their marginal rate of Income Tax.

If your clients start drawing large sums from their pension to pass on in the hope of mitigating IHT, they could increase their Income Tax liability, especially if they move into a higher tax bracket.

We can work with your clients to find a tax-efficient way to draw from their savings so they can fund their lifestyle and pass wealth to their beneficiaries.

For instance, many providers will allow your clients to draw from the tax-free and taxable portion of their pension at the same time. So, instead of drawing a full £25,000 from the taxable portion of their pension, they could take £12,500 from the tax-free lump sum, and another £12,500 from the remaining 75%.

Provided they didn’t receive any more income in that year, they wouldn’t exceed the Personal Allowance and so wouldn’t pay Income Tax.

If your client wants to draw additional funds to pass to loved ones, they may pay some Income Tax. However, we could still use this method to help them reduce their liability. Bear in mind that this strategy will only work while they have a portion of their tax-free lump sum left.

We may also recommend that clients draw from other tax-efficient savings, such as those in an ISA, to supplement funds they take from their pension, as this could further reduce the tax they pay.

Ultimately, with our support, your clients may be able to withdraw and pass more wealth to loved ones tax-efficiently while they’re alive.

Get in touch

If your clients want to review their estate plan in light of recent Budget announcements, we can support them.

They can contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.