Back in her 2024 Autumn Budget, the chancellor made some important Inheritance Tax (IHT) announcements.

Firstly, Rachel Reeves confirmed she was extending the current freeze on IHT thresholds to 2030. She then announced that pension wealth would be brought into the IHT net from 2027.

These changes are expected to significantly increase the Treasury’s take from the tax. MoneyAge reports that the number of estates facing an IHT bill could rise to more than 37,000 by 2027.

But there are measures you can take in your lifetime to reduce the IHT bill you leave behind. One such strategy is lowering the value of your estate through gifting money to a charity you care about.

Keep reading to find out more.

Proposed pension changes are forcing retirees to revisit their tax-efficient estate planning arrangements

FTAdviser recently reported on a 164% year-on-year increase in Google searches for “Inheritance Tax advice”. Searches for “Inheritance Tax grandchildren” have increased by 53%.

These figures aren’t surprising. Under current rules, pensions are generally outside of your estate for IHT purposes. If you die before age 75, your named beneficiaries can usually access your unused fund tax-free. On death after 75, pension funds still pass to your beneficiaries, but they will pay Income Tax on the amount they receive, at their marginal rate. There will be no IHT to pay.

Historically, these rules have ensured pensions play a key role in IHT planning. New rules, effective from 2027, could change that.

As with all elements of your long-term estate planning, it’s important to be prepared.

Professional Adviser confirms that 92% of advisers expect tax-efficient estate planning to become more important as a result of the proposed changes. Around two-thirds (65%) believe that charitable giving could play a key role for at least some of their clients. And at the Pension Planner, we agree.

Charitable giving is good news for a cause you care about, and can be tax-efficient too

You are liable for IHT on the value of your estate that exceeds the “nil-rate band”, frozen at its current rate of £325,000 until at least 2030. Leave your main home to direct descendants (children or grandchildren, say) and you might also benefit from the “residence nil-rate band”. This stands at £175,000 and is also frozen until the end of the decade.

If you think your estate will exceed these amounts on death, you might want to examine ways to lower the value of your estate.

Gifts made during your lifetime are generally free of IHT if you survive for seven years from the date the gift is made. This is known as the “seven-year rule” and the gifts as “Potentially Exempt Transfers” (PETs). Tax is paid at 40% on death within three years of making a gift and then on a sliding scale, known as “taper relief”, with no tax to pay after year seven.

If you opt to give money to charity, though, your gift is IHT-free from the outset. Not only that, but if you make charitable donations of 10% or more of the net value of your estate, you could see your overall rate of IHT drop from 40% to just 36%.

These rules, which are tax-efficient for you while also helping a cause you care about, have seen greater numbers of Brits consider charitable donations in recent months.

As well as giving while living, you might opt to leave a charitable legacy in your will

As well as making tax-efficient charitable donations during your lifetime, you might also opt to leave a charitable legacy in your will.

There are four main ways to do this:

1. Pecuniary legacy – Arguably the easiest way to leave a charitable donation, you simply specify the amount you want to leave and your chosen charity recipient, and they receive that donation on your death.
2. Residuary legacy – You leave the residual value (or a share of the residual value) of your estate to a chosen charity or charities, payable once all other bequests and expenses have been covered.
3. Specific legacy – A specific legacy simply means specifying the exact gift you intend to leave, be that stocks and shares, cash, or physical items such as land, property, or jewellery. You also need to be clear who the specified legacy should go to.
4. Contingent legacy – You might choose to leave a charitable donation contingent on another event occurring. For example, the death of a named beneficiary might see their portion go to your chosen charity.

Remember, these choices must be clearly laid out in your will. Doing so could help a cause you care about while lowering the IHT liability you leave behind.

Get in touch

If you need help managing your estate and a potential IHT bill, get in touch. Email info@thepensionplanner.co.uk or call 0800 0787 182.

Please note:

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

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.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief. Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

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