In our recent survey of Which? members, a quarter said the new rules will alter their estate planning, while two in five expressed concern about the changes – even if they were unsure exactly how their finances would be affected.
Here we explain how the changes could affect you, how others are currently preparing, and what you can do to minimise a potential inheritance tax bill.
so you can see more independent news written by expert Which? journalists.How are inheritance tax rules changing?
Inheritance tax is charged on the value of an estate (this includes property, savings, possessions and investments) that exceeds your tax-free thresholds.
Thanks to the nil-rate band, everyone can pass on £325,000 tax-free – with an additional allowance of up to £175,000 if you're leaving your estate to direct descendants.
As a result, only a small proportion of deaths each year (around 4%) result in an inheritance tax bill.
However, that number is set to rise from April 2027, when pension savings are included as part of an individual's taxable estate. Previously, any unspent pensions could be passed on tax-free.
Government estimates suggest that the changes will result in 10,500 estates paying inheritance tax for the first time in 2027-28, while 38,500 more will see their bills increase (by around £34,000 on average).
Find out more:What can you do to prepare?
Inheritance tax can be legally mitigated, provided you understand the complex rules. We asked Which? members how they're preparing for next year’s changes – here are the key strategies they are using.
Spend more during retirement
Before the changes were announced, pensions had been seen as a tax-efficient way to pass on wealth. But the new rules have prompted people to take more out of their pot than they otherwise would have done.
Our survey shows that one in seven people are already spending more of their pension in anticipation of the changes. And almost half of respondents say they plan to do the same.
How to do it
This strategy involves striking a balance between enjoying your money now, and leaving enough to cover expenses you might face in future, such as care costs.
Find out more:What to be aware of
Outliving savings: Tax efficiency: 60% tax trap:Gift more to loved ones
Giving money away during your lifetime is a simple way to reduce the value of your estate – and potentially avoid an inheritance tax bill altogether.
One in five respondents to our survey said they've already increased the amount they've given to loved ones over their lifetimes, and two in five are considering doing so in the future.
How to do it
Gifts made using the following allowances will never be subject to tax:
Another option is to make gifts out of surplus income. You can give away any amount of money tax-free as long as it's paid on a regular basis and does not diminish your standard of living.
If you’re doing this, then you must also keep detailed records of your income and gifts to prove to HMRC that these payments were truly from surplus income.
Find out more:What to be aware of
The seven-year rule: Depleting your allowance: Gifts with reservation:Immediate tax triggers: Permanence:Donate to charity
Any money you leave to charity is tax-free and reduces the total value of your estate. If you give away at least 10% of your estate, the tax rate on the rest of your assets drops from 40% to 36%.
Our research shows one in 10 have already given more to charity, and one in six are planning to leave more of their pension to a charitable cause in their will.
How to do it
There are different ways you can leave a gift to charity in your will. This includes leaving a fixed sum of money, a specific asset (such as a property) or a percentage of your estate.
To reduce your tax liability, you'll need to leave at least 10% of your overall baseline estate. The baseline of your estate is the value after the nil rate band and any other reliefs and exemptions have been applied.
Find out more: The charity's status:How your pension will be passed on:Buy an annuity
Annuities are growing in popularity thanks to improved rates. Purchasing an annuity reduces your estate immediately because the money you exchange for it is removed from your taxable assets.
Our research found that 6% have already bought an annuity in response to the upcoming inheritance tax changes, while one in eight are planning to do so.
How to do it
Annuities come in several forms, including level options that pay a fixed amount and escalating annuities where payments rise over time. You can opt for a single-life product, where payouts stop when you die, or a joint-life annuity, where payments continue to be made after your death (usually to a spouse or civil partner). These payouts will continue to be exempt from inheritance tax.
You should always shop around to find the best annuity rate.
What to be aware of
What happens to payments when you die: Inflation risk:Lack of flexibility:Put a life insurance policy in trust
Life insurance sales have surged in the past year as more people look for ways to mitigate the impact of inheritance tax in view of the upcoming rule changes.
Our survey found that 4% have opted for a life insurance policy to help with a potential inheritance tax bill, with one in eight planning to do so.
How to do it
If your life insurance policy is written in trust, the payout is usually exempt from inheritance tax, meaning it can help beneficiaries settle the bill without having to sell assets.
A ‘whole of life’ policy will pay out when you die – regardless of when that happens, while term insurance pays out if you die during the term of the policy.
You can choose whoever you like as your beneficiaries, often it's family members or friends – although you can also choose to leave this money to charity too.
How much cover you will need depends on what you want your beneficiaries to do with the payout. If you're using life insurance to cover some or all of an inheritance tax bill, you need to find out how much this is likely to be.
If the payout is specifically for inheritance tax, you must also let your executors know so they can use the proceeds to settle a bill with HMRC.
Find out more:What to be aware of
Costs: Inflexibility: The importance of a trust: Difficult to change:source https://www.which.co.uk/news/article/one-year-until-inheritance-tax-applies-to-pensions-how-to-prepare-aAIQo7f2J3d3