Four ways to mitigate an IHT bill on pensions from April 2027 | Adviser insight

As the new tax year kicks off, savers have four options to mitigate the impact of pensions being brought into their estates and made liable for inheritance tax (IHT) from April next year, according to a financial planner who has seen a huge increase in the number of enquiries from clients on the topic.  

The latest available figures from HMRC show that the share of estates liable for IHT has reached its previous high of 4.65%. While that was still fewer than one in 20 estates, the 31,500 paying an IHT charge was an increase of 13% on the previous year and the total amount owed reached £6.7 billion – a new record.

Those figures are only likely to increase considerably from next year, as pensions are brought into estates and the IHT threshold remains frozen until at least April 2028 – and likely to 2031. The standard tax-free threshold is £325,000 for an individual, with an additional £175,000 in their nil-rate residence band, meaning a couple can pass on up to £1 million tax-free.

Adrian Murphy, CEO of Murphy Wealth, said: “For years, many people saving for retirement have been told to prioritise building up their pension pot and then using it to pass down wealth to family members without incurring IHT. The fact they’re not part of estates changes that advice to a degree and, as a result, we’ve had a lot more clients asking about what they should do ahead of April 2027.

“The first thing to say is that pensions remain the best way of building long-term wealth. The tax relief contributions received from the government make a huge difference over time. But what does change is how you structure your income in retirement – pensions may become one of the first sources of income you look to, rather than the last.

“Broadly speaking, there are four potential options for mitigating a future IHT liability. None of them can magically make any tax due on an estate disappear, but they do provide options for reducing or helping your family with a substantial tax bill – notwithstanding this needs to be done in a sustainable way, without leaving you short of money for your own retirement.”

Gifting and spending – be careful with the rules

HMRC rules allow spouses and civil partners to gift unlimited assets between them. But, when it comes to passing down wealth to the next generation, every individual has a gifting allowance of £3,000 per year.

If part or all of this exemption is not used in a tax year, it can be carried forward to the next tax year – but only for one year. There are also additional one-off exemptions, such as wedding or civil ceremony gifts of up to £1,000 per person, increasing to £2,500 for gifts to a grandchild or £5,000 for a child.

Adrian Murphy said: “Gifts made more than seven years prior to the person passing away are exempt from IHT – these are known as potentially exempt transfers. We have had more clients look to pass down wealth earlier in life to take advantage of this rule. There have been suggestions that the government was looking at a cap on how much you could gift this way in your lifetime, but that has not materialised into anything concrete.

“Besides that, if your circumstances don’t allow for making large gifts earlier than you’d originally planned, use as much as you can of your annual gifting allowance. That may take years to reduce a large bill, but anything made beyond that will eat into your nil-rate band if you pass away within seven years of the gift. Just be sure to document each transaction, detailing the date, amount transferred, the recipient, and the method used.

“The simplest and most straightforward way to reduce the size of your estate is to spend money on your family. If you have family holidays planned, for example, then you could foot the bill. Or you could gift out of excess income, but this can be a tricky area and there are specific rules to follow. Either way, if you don’t spend it, HMRC will – obviously with the caveat that you should do so within your means and without affecting your longer term financial plans.”

Trusts – numbers surge, but they’re an expensive option

According to HMRC figures, there were 835,000 trusts open as of August 2025, with 121,000 new registrations in the tax year before. Broadly speaking, there are two different set ups for trusts: absolute and discretionary.

Absolute trusts allow trustees to decide how the assets are given to beneficiaries – as income, lump sums, or when they reach a certain age, for example. But the beneficiaries cannot be changed.

Discretionary trusts introduce different classes of beneficiaries. Rather than name individuals, they might be used to pass down wealth to children or grandchildren as a group – even if they are yet to be born. However, you can still decide how they will be paid, whether it is an even split, or if one is to receive more.

Adrian Murphy said: “For individuals who want to control how their wealth is passed down, trusts could be an option. These arrangements allow the person to nominate beneficiaries and pay out through income or capital growth at their discretion.

“Selecting the right type of trust can be a very powerful tool. With discretionary trusts, for instance, if the next generation have money problems or split from their partners, the assets held within it won’t be lost during the bankruptcy or divorce processes. However, trusts can be expensive – so speak to an adviser about whether it would be worthwhile for your situation.”

Insurance – won’t remove an IHT liability, but will cover it

Taking out a life insurance policy can be another option. It doesn’t remove an IHT bill, but protection can be bought to cover a future liability – albeit, that may increase over time, but the policy is taken out for a fixed amount.

Depending on your age and family history, a policy may be expensive. But the cost will be influenced by what form of cover you take: term, whole of life, and Gift Inter Vivos, each of which have their advantages and disadvantages.

Adrian Murphy said: “Insurance is particularly useful where you want to keep money for retirement or care costs and, while the IHT bill will still be there, the liability will be covered by the lump sum paid out by the policy. This can be put into a trust with named beneficiaries, bypassing the deceased’s estate.

“With a term policy, you are only covered for an agreed amount of time. If you decide to renew that when the policy ends, you may find it difficult to secure cover, depending on your age, or it may be much more expensive.

“Whole of life cover will, in almost all cases, be the most expensive. There is a substantial premium attached because it is guaranteed to pay out, which means the premiums can be tens of thousands of pounds for a few hundred thousand pounds of cover.

“Gift Inter Vivos policies provide just seven years of cover, but are generally cheaper. However, broadly speaking, they are only relevant to large gifts made above the nil-rate IHT band.”

Business relief and EIS – only suitable in specific circumstances 

Finally, another option open to people who are comfortable investing their money is to look at alternative investments which carry IHT advantages. These are usually in schemes designed to channel investment directly into early-stage or trading businesses, and that makes them high risk – but the trade-off for investors is the tax relief.

Adrian Murphy said: “Business Relief and Enterprise Investment Schemes (EIS) investments benefit from having a zero value in your estate after a qualifying period of two years, provided you still hold them when you pass away.  

“These investments are deemed to be high risk and should not be considered without taking appropriate financial advice – they will not be suitable for everyone. But they are becoming more popular due to the changes in legislation, particularly with pensions being brought into estates from next year.”