The landscape of inheritance tax (IHT) in the UK is shifting. For many years, pensions were seen as a safe haven for passing on wealth. However, with the upcoming April 2027 deadline, the rules of the game are changing, and for those with significant estates, the time to act is now.
This week, I am consulting with a client whose estate exceeds £4m. While a successful life should be celebrated, the reality is that without a clear strategy, his death could trigger an eye-watering tax bill.
The 7-Year Clock: Why You Can’t Wait
The most critical factor in estate planning is the 7-year rule. Any significant gifts or transfers into certain trusts take seven years to fall entirely outside of your estate for tax purposes. If you wait until 2027 to start planning, you are essentially gambling with your family’s inheritance.
Alec’s Three Pillars of Estate Planning
When I advise on legacy planning, I simplify the options into three choices:
• Spend it: There is no tax on memories. I encourage clients to enjoy their wealth.
• Give it away: Direct gifting is effective, but it requires you to give up control and ownership immediately.
• Move it into a Trust: This is often the "sweet spot" for generational planning.
The Power of the 25% Pension Strategy
In the past, many avoided touching their pension pots to keep them outside the IHT net. Now, the strategy has flipped.
Consider a client with a £1m pension. By taking the 25% tax-free element (£250k) now and placing it into a Generational Trust, they achieve a powerful dual benefit:
1. Control: You can still access the income generated by the trust.
2. Efficiency: While the initial sum is a "gift" (subject to the 7-year rule), all future growth on that £250k is immediately outside the estate.
A Call to Action for the Over 55s
If you are over 55, your current financial plan may be outdated. The inclusion of pensions in the IHT calculation means your potential liability may have just skyrocketed.
Don't leave your legacy to chance. Review your estate, look at your pension through a new lens, and start the clock today.
Contact Alec Cameron at Advice2u for a comprehensive estate review.
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