Following the 30 October 2024 Budget, the UK government has announced a significant overhaul of the tax system, drawing keen attention both domestically and internationally. These reforms, effective from April 2025 and beyond, will profoundly impact estate planning, pensions, and inheritance tax (IHT) — especially for long-term residents, non-domiciled individuals, and high-net-worth families.
This guide outlines the key changes, their implications, and how to protect your wealth and legacy.
Non-Domicile Regime Replacement: From Non-Dom to Residence-Based Taxation
The non-domicile (non-dom) status, which has long provided certain tax advantages for foreign income and gains, will be replaced by a residence-based system from 6 April 2025. Key features include:
- Four-year Foreign Income and Gains (FIG) Regime: Individuals becoming UK residents after 6 April 2025 will receive a grace period of four years during which foreign income, gains, and certain distributions from non-resident trusts remain exempt from UK tax.
- Ten-out-of-20-Year Residence Rule: IHT will now apply to non-UK assets of individuals who have been UK tax residents under the Statutory Residence Test for at least ten of the previous twenty years.
- Broader Impact: These reforms target long-term UK residents previously relying on non-dom status, as well as high-net-worth individuals with offshore trusts or UK assets.
Inheritance Tax on Pensions: A New Frontier from 2027
From 6 April 2027, most unused pension funds and death benefits will be included within the value of a person’s estate for IHT purposes. This represents a major change, as pensions were previously excluded from estate valuation.
- New Responsibilities: Pension scheme administrators will be liable for reporting and paying any IHT due on pensions.
- Practical Challenges: Issues such as valuation of pension funds, lifetime transfers, and ill-health considerations pose complexities for pension providers and executors.
- Action Point: Review and update expression of wishes and beneficiary nominations now to reflect the new rules.
APR & BPR: Current Rules vs. Proposed Changes
- Current Reliefs:
- APR: Up to 100% IHT relief on qualifying agricultural land, buildings, and farmhouses.
- Ownership/use requirements: 2 years (owner-occupied) or 7 years (let).
- BPR: Up to 100% IHT relief on:
- Shares in unlisted trading companies.
- Sole trader businesses.
- 50% relief on non-controlling or partially owned business assets.
- Must be held for 2 years prior to death.
- No cap currently on the value eligible for either relief.
- APR: Up to 100% IHT relief on qualifying agricultural land, buildings, and farmhouses.
- Proposed Reforms (from April 2026):
- Combined cap of £1 million on APR and BPR per estate.
- Stricter criteria:
- APR: Tighter definitions of what qualifies as “agricultural use”.
- BPR: Focus on excluding passive investment assets (e.g., rented land, non-trading holdings).
- Increased compliance requirements and potential valuation complexity.
Retirement, Pensions, and Cashflow Planning
Income and Savings
- State Pension: The amount depends on your National Insurance contributions, with current averages around £1,000 per month.
- Private pensions: Typically accessible from age 55 (rising to 57 in April 2028). They offer tax relief on contributions and allow up to 25% of the pension pot to be taken tax-free, making them a tax-efficient way to save for retirement.
- Emergency Fund: Maintain 3–6 months of living expenses in cash to cover unforeseen costs.
- Investments: Consider tax-efficient vehicles like ISAs (£20,000 annual allowance), general investment accounts (utilising CGT and dividend allowances), and bonds (which offer tax deferral on gains).
Pensions and IHT
- From 2027, pensions form part of the estate for IHT.
- Review expression of wishes now—ensure they align with your legacy plans.
- Defined benefit and annuity schemes provide guaranteed income but differ in tax treatment.
- Consider consolidating pots versus annuities depending on your longevity and income needs.
- Take advantage of employer-matched pension contributions and consider asking to increase your contributions to boost your retirement savings and tax efficiency.
Tax Allowances and Reliefs Overview
- Personal Allowance: A portion of your income is tax-free each year before income tax applies.
- Dividend Allowance: A set amount of dividend income is exempt from tax annually.
- Capital Gains Tax Allowance: Each year, you can make a certain amount of profit from selling assets without having to pay capital gains tax.
- Savings Allowance: Interest earned on savings is tax-free up to a threshold that varies based on your income level.
- Gift Allowances: £3,000 annual exemption, small gifts up to £250, and marriage gifts (£5,000, £2,500, or £1,000 depending on relation).
- Nil Rate Band (NRB): £325,000 per individual.
- Residence Nil Rate Band (RNRB): £175,000 additional allowance when passing a main residence to direct descendants, tapering for estates over £2 million.
Gifting and Trusts in IHT Planning
- Gifting: Gifts within seven years of death may still attract IHT, but taper relief applies.
- Gifts out of Income: Regular gifts from surplus income can be exempt (habitual and not affecting living standards).
- Trusts: Discretionary and loan trusts allow flexible wealth transfer while managing IHT exposure.
- Business Relief: Holding qualifying business or agricultural assets for two years can attract up to 100% relief (reducing to 50% from April 2026).
- Charity Gifting: Leaving at least 10% of your net estate to charity can reduce the IHT rate on the rest of your estate from 40% to 36%.
Other Important Considerations
- Insurance: Life insurance policies held in trust can help cover IHT liabilities.
- Pensions and Gifting Strategies: Large pension withdrawals may push you into higher tax brackets; careful planning can mitigate this.
- Long-Term Care Planning: Consider equity release, downsizing, and annuities to fund care costs while managing inheritance and tax.
- Investment Diversification: Balancing cash, stocks, bonds, ISAs, and pensions reduces risk and improves tax efficiency.
- Women and Pensions: Women tend to have smaller pension pots and longer life expectancy; tailored advice is essential.
- International Aspects: Offshore bonds and international investments require specialist tax advice.
- Generational Inequality: Passing wealth directly to grandchildren can improve tax efficiency, particularly if they’re in lower tax brackets when accessing funds. Recent changes to IHT and pension rules make strategic planning across generations more important than ever.
Preparing for the Future
The 2025 tax reforms mark a fundamental shift in how wealth and inheritance are taxed in the UK. It’s vital to:
- Review your estate plan, pensions, and investments.
- Update wills and trust structures.
- Seek professional advice on the new residence-based IHT rules.
- Consider gifting and business relief opportunities carefully.
- Plan cashflow and income needs in retirement.
- Communicate openly with family to manage expectations and preserve legacies.
With the complexity and breadth of these reforms, staying informed and proactive is key. The right planning now can safeguard your wealth, ensure compliance, and leave the legacy you envision.
Contact Our Wills & Estates Lawyers for Expert Advice
Our Private Client team is here to support you with all aspects of estate and trust planning. Whether you need a straightforward Will or a comprehensive, bespoke solution involving trusts or tax-efficient wealth transfer strategies, we can guide you through every step.
We can assist with:
- Appointing trusted executors and trustees
- Protecting the future of your children and vulnerable beneficiaries
- Establishing and managing trusts tailored to your family’s needs
- Minimising inheritance tax liabilities through careful planning
- Ensuring your wishes are respected and legally upheld
Rose Varsani on 0207 387 2032
📧 Email: pvarsani@lewisnedas.co.uk
Disclaimer:
This blog is for general information only and does not constitute legal advice. For personal guidance, please contact our team to speak with one of our solicitors.