Our clients came to us with a pressing concern: under upcoming government legislation, their £800,000 pension, previously exempt from inheritance tax, will soon be included in their taxable estate. This change risked significantly increasing their Inheritance Tax (IHT) liability and reducing the amount they could pass on to their children.
With a strong asset base, a comfortable lifestyle, and a desire to protect their legacy, they needed a proactive plan to stay ahead of the rule changes and minimise the long-term impact on their estate.
Initial Financial Position
At the time of their initial review, our clients’ total estate value was approximately £1.35 million. This was made up of:
- £750,000 property value.
- £100,000 cash savings.
- £500,000 investments (ISAs and bonds).
The clients had no debt, lived a comfortable lifestyle with plenty of disposable income to cover their leisure activities, and a pension value of around £800,000. They had initially ringfenced this to pass on to their children, as historically this money has existed outside their taxable estate.
Their £1.35 million estate value placed them £350,000 over the combined Nil-Rate Band (NRB) and Resident’s Nil Rate Band (RNRB) thresholds, which for a married couple totals £1 million.
Given the current 40% tax rate, this left them with a total IHT liability of around £140,000, which they planned on reducing by spending their cash savings and investments over time.
The Challenge They Faced
Due to new government legislation, from April 2027 pension assets will be included in a person’s taxable estate.
For our clients, this means an increase in estate value from £1,350,000 to £2,1500,000.
This increase takes their estate to a valuation of over £2,000,000 which triggers the RNRB tapering threshold. The RNRB is reduced by £1 for every £2 over the £2,000,000 threshold.
As the clients are now £150,000 over the £2,000,000 threshold, their total relief reduces by £75,000, from £1,000,000 to £925,000.
This increases their total IHT liability from around £140,000 to around £470,000, almost quadruple their initial liability.
The Solution: A Strategic Restructuring
To mitigate the growing tax burden, we proposed a strategic shift to begin reducing the size of the client’s pension over time while maintaining their lifestyle flexibility.
Step 1: Tax-Free Pension Withdrawal
The clients utilised the 25% tax-free cash from their pension, taking this £200,000 and investing it into a Gift Plan. By placing their money into a Gift Plan, they are able to maintain control over their money while starting the clock on the 7-Year Rule for the initial investment. Any growth achieved by the investment is immediately outside of the estate and exempt from IHT.
If the clients survive the seven-year period, the gifting strategy may provide significant Inheritance Tax benefits.
Step 2: Whole of Life Insurance
We arranged a Whole of Life Insurance Policy for the clients, which is funded by regular income from their pension, with premiums of £550 per month. This policy is designed to pay out £400,000 tax-free to their children on second death, directly covering the remaining IHT liability while simultaneously whittling down the size of the pension, further reducing IHT liability.
The Outcome
As a result of their new Estate Planning Strategy, the clients retain full ownership of their home and are able to maintain their comfortable lifestyle without compromise.
They maintain control of their money through the Gift Plan while removing assets from their estate over time.
Their life insurance policy is intended to provide funds that may assist beneficiaries in meeting a potential Inheritance Tax liability, leaving a clean, tax-efficient legacy as the clients had wished for.
Providing the clients survive the 7-Year Rule, their estate value will fall below the £2,000,000 RNRB tapering threshold, fully recovering their full relief and further reducing their IHT liability.
How can Cooper Associates Wealth Management help you?
While in many cases, reducing an Inheritance Tax liability can be challenging, proactivity in planning allows for meaningful steps towards mitigation.
Our team of expert advisers can help you through the entire estate planning process, creating a strategy tailored to your unique circumstances and future financial goals, to ensure that your IHT liability is minimised to the greatest extent possible.
Contact us today to discover how we can help you to leave a lasting, tax-efficient legacy that could survive for generations.
*The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends upon individual circumstances.
*Based on an actual client experience. Individual results will vary.
