Protection planning and IHT: Getting ahead of future liabilities

There are two stages of changes. The first, from April 2026, will see some business owners and farmers facing changes to agricultural property relief and business relief. Recent updates to the original proposals will see an allowance of £2,500,0000 for a 100% rate of relief, and a 50% rate of relief thereafter. Married couples or civil partners will be able to pass on their allowance in a similar way and in addition to their NRB.

The second change from April 2027, when pensions are currently expected to come into scope of IHT. This may have the biggest impact on the number of estates paying IHT with less than 14 months until its inclusion.

Nil Rate Bands (NRBs) have also been frozen until 2031, which will see more clients pulled into paying IHT by the ‘fiscal drag’ this causes.

Protection as solution to mitigating IHT

Many clients who’ve been decumulating in a specific order (such as using pension schemes as a tax planning tool to transfer wealth without a paying IHT) will need to rethink their plans, as the upcoming changes will have a significant impact.

It’s crucial for individuals to review their estate and legacy plans as soon as possible, even though the liability isn’t effective until April 2027. This ensures there’s time for appropriate strategies to be put into place. Traditional estate planning options may no longer be practical or sufficient for many clients because of the short time frame. In those cases, protection – specifically policies written in trust – can offer a way to manage an otherwise unavoidable (and increased) IHT liability.

Where clients choose to access pension funds earlier than originally planned, to spend or gift may be subject to the individuals’ marginal rate of income tax.

Simply put, many don’t have enough time to switch over to a different strategy. Where their assets are tied up or their age prevents them from gifting, protection may be the most suitable option.

How can these solutions help?

Gifting for many is still the primary strategy for Inheritance Tax planning but can present a seven-year problem if clients gift now. Some clients will be looking to change decumulation strategies or make additional gifts now without waiting for the changes. For these clients, term assurance of gift-inter-vivos plans may be appropriate.

Some clients will have a lifetime problem and are unable or unwilling to gift. These changes could increase their liability and their need becomes for whole of life protection.

Taking account of future changes

The advice process can naturally take some time, from multiple client meetings, research and product selection, to the underwriting journey. IHT planning will typically be undertaken for older clients who’ll likely need to go through an underwriting journey. This may require a nurse screening or a doctor’s report, even for relatively modest sums assured at older ages.

L&G can insure your clients to cover their full IHT needs, including their future increased liabilities caused by these changes. You don’t have to wait until the changes take place, by which time the client will be older and may have further medical details to disclose.

In short, you can put in place valuable protection cover today to include the increased liabilities that will be caused by agricultural and business properties and / or pension schemes.

You have dedicated support at L&G to help you through this process. Our BDMs are on-hand to help you. They can put you in touch with the underwriting team before you apply so you know the likely underwriting requirements and outcomes for particular disclosures.

 

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