Navigating IHT reforms

Hi everyone and thank you very much for your time. Now, my name's Justin Corliss and I'm joined today by my colleague Gregor Sked. We're both part of the technical marketing team here at Royal London, and today we are going to discuss navigating inheritance tax, or IHT as I'm going to call it, as we go through reforms, as this is at the forefront of many advisers' and clients' minds ahead of the imminent changes to IHT.

We know that IHT will apply to unused pensions and death benefits from April 2027, but there's also changes to business and agricultural property relief taking effect from April 2026. Inheritance tax and strategies to deal with its impact is a pretty broad topic, I think we'll agree, and we could never cover every aspect of it in a single webinar, so we're not actually going to even attempt to do so.

So, we are going to focus on those individuals whose inheritance tax issues largely result from the upcoming changes. They didn't have much, maybe didn't have any inheritance tax liability based on the current regulations, but are likely to have one after 2026 or 2027. Now, in the case study that we're going to work through, the clients in question don't have significant levels of investible assets outside of their pension, so there's less focus on IHT friendly investments as a solution to their IHT problem. Instead, we'll explore protection options to meet IHT charges as they fall due, options for gifting during a client's lifetime, and some other useful strategies for intergenerational wealth management.

Now, just before we move on, it's worth pointing out that this is our current understanding of, you know, what is somewhat limited regulation and draft legislation around the upcoming IHT changes. So, to keep abreast of any future changes or even just points of clarification that we get from time to time, please visit our technical central website where you'll be able to access lots of other useful technical support on this and a host of other topics as well.

Now if you are watching this live, you'll be able to quite soon after the webinar, go on, complete the questions that will generate your CPD certificate. And if you're watching this at a later date, there will be instructions as to how to get all of that. But of course, for all this to be CPD-able, we need to have some learning objectives, don't we? By the end of this session, you'll be able to explain the impact IHT applying to pensions will have on clients, outline the main protection solutions available to clients concerned about IHT liabilities, and describe the technicalities of intergenerational planning strategies, including the use of pensions, protection, and equity release to reduce IHT liabilities across generations.

Okay. Let's begin with a quick recap of the high-level changes coming to the treatment of different assets in respect of inheritance tax. Now beginning on the left and something that's quite easy to gloss over, I suppose if we're not careful but also something that's an enormous number of estates rely on and will rely on: the spouse and civil partner exemption will still be valid after the upcoming changes, so there's no inheritance tax payable on assets passing between spouses and civil partners. The next two points there clarified what was in the consultation response or we got clarification from the consultation response. And that is the consultation on response on IHT applying to pensions that also came out on the 21st of July 2025, this year. Death in service payments, whether they be discretionary or non-discretionary, will not be in scope of inheritance tax applying to pensions from the 6th of April 2027. And similarly, we know that survivor benefits from a joint life annuity will not be in scope either. You can see in the middle point there inheritance tax. It's a residence-based tax, so do be mindful of clients with complex or unusual residency status. And from the 6th of April 2026, there will be a 1 million individual allowance for business and/or agricultural property relief. And just to be clear there, that's 1 million in total across agricultural property relief, business relief, not 1 million for each. Now, as you can see on the slide there, that allowance is not transferable. And from the 6th of April 2027, IHT will apply to unused pensions and death benefits. Probably not too much of a revelation, that one. And finally, that the nil rate band and residence nil rate band are frozen until 2030. And do you know the upshot of much of all of this is that more people are going to be bought into scope of IHT and many people already expecting to face an IHT charge are likely to see that charge increase.

And of course there could be further changes to all of this in the budget that is upcoming at the time of recording this, it will be coming along on the 26th of November this year. So, there could be changes in there that we're not even aware of yet. So once again, please keep an eye out for that and please visit our Technical Central website to be able to see all of these changes and updates if they do come.

Okay, so one thing is for certain amongst all of the uncertainty, life insurance and related protection products have become more important tools, and these are often going to be the most effective way to fund an IHT bill. At the end of the day, it provides the cash flow at the moment that the tax is due.

Now, before we look at our case studies, okay, here are four strategies to utilise in the protection solutions. You can see those on the screen there. You know, taking out life cover, whether that is through a whole of life policy, whether that be guaranteed or reviewable, a joint life second death, or just a term policy plan in trust to match the anticipated IHT liability, allowing for that immediate cash flow on death.

Now clients could use pension withdrawals, so you know, PCLS or tax-free cash or proceeds from drawdown to pay those premiums on the insurance policy. And do you know what? In doing so, clients are effectively shifting part of their pension into an IHT exempt wrapper, assuming of course, that that protection policy is written in trust, and importantly, if the premiums qualify for normal expenditure out of income, they can be IHT free as well.

Okay, let's now just run through a case study that considers a family, the various different IHT and intergenerational planning issues they may potentially face, and some possible solutions as well.

Now, of course all clients are different and have different needs, objectives, even preferences. So, these are potential solutions, not necessarily the only solution. And I do reiterate the point that I made at the beginning of the webinar. In this case study, we are really focusing on the impact of changes to either agricultural or business relief from April 2026 and pensions applying to inheritance tax from April 2027.

And furthermore, we're focusing on people who don't have significant levels of investible assets outside of their pension to enable them to make use of investment-based solutions like bonds in trust or enterprise investment scheme investments, that sort of thing. So yes, for some clients these will be important parts of their IHT strategy, but they won't be an option for everyone facing an IHT charge. And, as you'll see, aren't the most suitable option for our case study subjects.

Okay, so this is our family that we are going to look at. We have Gustav and his children, Anna and Theo. So, let's begin by finding out a little bit more about Gustav, who unfortunately has relatively recently lost his wife Nina. He did however when she passed away, he did inherit her full nil rate band and residence nil rate band as well.

Okay. So, we know we've got Gustav, he's aged 75. He owns his own home mortgage free, which is currently valued at 1.75 million. He currently receives state pension benefits of £12,000 per annum and a defined pension in payment or defined benefit pension in payment of £18,000 per annum. And so, as you'd expect, both of these have some sort of inflation protection attached to them. Between his state pension benefits and his private pension income, he has sufficient income to meet all his regular living expenses. Now, Gustav also has an income drawdown plan that's currently valued at £350,000, as you can see. To date, he's only really needed to use this for extras- you know, holidays and upgrades to car and that sort of thing. He's already taken all available PCLS from that plan. And as I mentioned a moment ago, he's got two children: Anna, who's 55 and Theo, who's 45.

Now we know a little bit more about Gustav. Let's look at his IHT position, both now and post the 6th of April 2027. So, as you can see on the left-hand side, Gustav's current position, the only asset he has subject to inheritance tax is the house valued at £1.75 million. As he inherited his late wife's full nil rate band and does plan to leave the house to their children, he has a nil rate band and residence nil rate band totalling £1 million, meaning the existing IHT liability is 40% of the £750,000 above that £300,000 that works out to be, and he has an existing whole of life plan there to cover that. Now post April 2027 however, the position is somewhat different as Gustav's income drawdown plan will be included in the IHT calculation and that has a double impact. Okay? Firstly, it adds to the value of the pension or adds the value of the pension to the estate for IHT purposes, so an extra £350,000. But in addition, it takes the value of the estate over £2 million to £2.1 million. In fact, as you can see over on the right-hand side, which means that the residence nil rate band begins to taper with Gustav losing one pound of residence nil rate band for every two pounds, that the estate exceeds £2 million.

Now, as the estate will then exceed the £2 million mark by a £100,000, he loses £50,000 of the residence nil rate band, meaning the available nil rate bands overall, are £950,000 instead of £1 million against an estate subject to IHT of £2.1 million rather than £1.75 million.

The upshot of all of this is all other things remaining equal, from April 2027, the IHT liability will be £160,000 greater than it is today, up to £460,000 from £300,000.

Okay, what I'm going to do just now is I'm going to hand you over to Gregor to take you through the next section of the webinar.

Thanks Justin. So, what does all of this tell us about Gustav's advice needs? Well, we know that he's inherited his late wife's nil rate band. And we do to confirm, but we would likely assume that they'll leave the house to his children who are of course, his lineal descendants. So, the residence nil rate band will be available, meaning a total of £1 million is going to be available through his nil rate band.

Now, although this is about to be tapered down from April 2027, once the estate exceeds that £2 million mark again, as a result of pensions being included, as we've just seen. Now remember there is going to be an existent whole of life plan covered within his scenario there because he knows that there's an IHT charge on from the property.

He's got minimal cash reserves outside the pension, so it does limit some of his investment based IHT mitigation options. He wants to gift £100,000 to Theo, his son, for a house deposit. And of course, within all of this, Gustav wants to reduce the impact of his potential IHT charge as much as possible, which will get significantly larger with unused pensions and death benefits being brought into scope of IHT.

So, what are some of the possible solutions? Well, there is always the option to do nothing, something that many end up doing, but of course it might still mean that IHT will be due to HMRC and actually that ultimately means less money for beneficiaries to inherit, so perhaps not that appealing. Now if Gustav has already taken his PCLS from his pension, he may consider equity release for Theo’s house deposit, and that actually would be a potentially exempt transfer, usually referred to as a PET, which could create in itself a protection need.

Given his increased IHT liability with pensions coming into the scope of IHT, Gustav may want to increase his income drawdown withdrawals, and that can help enable gifting out of normal expenditure. Now often when we discuss IHT solutions, we do tend to talk about the use of bonds placed into trusts, discounted gift trusts or loan trusts, perhaps, even.

But as Gustav doesn't have significant investible assets outside of the pension, it's really quite an unlikely suitable option for him, and this really leaves us with insurance, or to put it another way, a way of providing these beneficiaries with the money, with the capital to pay any IHT due.

And of course, this is where life insurance comes into play. And here we're particularly looking at whole of life policies. Now these plans are really a cornerstone of inheritance tax planning, where there's an IHT liability that's expected to remain indefinitely or until death. Now, in these situations, a whole of life plan could be used to provide that beneficiary or beneficiaries with the required amount of money to pay HMRC.

Now how we position a product like whole of life can make a massive impact because we really need to be leading with the value that it brings. There's a reason for this because big products often come with quite large premiums and if you put yourself in a client's shoes, would you actually buy something with a big price tag that you didn't really understand how it works. So, it's unlikely that clients would think to do so either.

One thing to understand is that whole of life and what it was and how it works, because I think many may have heard about it before. Many may also be quite unsure about what it really means to them. At the end of the day, in their eyes, life insurance may well be just life insurance.

For most people, their default view of it is quite naturally term assurance, because if they've ever interacted with life assurance during their life, it'll likely have been term assurance because, for example, let's say maybe 20, 30 years ago, if they took out their first mortgage, they likely took out some decreasing term assurance, often associated with a relatively modest cost with the purchase of the property.

It's a very subtle difference in language, but it's a massive difference in product. One pays out if an event happens, the other pays out when that event happens. Very, very different. Another way to articulate whole of life is imagine we've got a client like Gustav. He has an IHT bill of £300,000 currently. Would they be interested in a way of producing that £300,000 immediately without any risk in respect of interest rates, fund performance, et cetera? If we could show you a way of doing that, would that be of interest? Well, that's what whole of life does, and the moment that, again, that you're on risk, whether it's single life, joint life, that amount of money, that £300,000 in this example is accrued instantaneously.

The clients can't get their hands on it, but of course it's not for them. It's for their loved ones and their part of the bargain is really to make sure that the premium is paid each month. Think of it as a small amount of your IHT bill that you're paying off whilst you're alive. But you pay this amount per month, it's not going to be free. Again, the premium is still to be paid. You've got to pay this amount each month just to keep that money, again, right? To be able to be accrued immediately.

Now in terms of the types of whole of life there are a couple of main whole of life solutions out there. You've got your guaranteed rate whole of life policies. Now these are there to provide security that the cost of the cover will not change in the future. Premium is going to be fixed for life. And that actually gives clients a lot of certainty. There's no surprises and they know that the cover will always be there when it's needed.

If, however, you've got clients that plan to reduce their IHT liability, maybe obviously during their lifetime, for example, by gifting assets to the family or by a way of other IHT friendly investments, a whole of life plan with reviewable rates might be more suitable. Now that type of plan provides often cheaper cover in the early years compared to the guaranteed rate plans. And as the IHT liability of the estate reduces, the sum assured can be reduced accordingly and therefore may well offset any future premium increases, and generally this is done at particular review points: generally starts at 10 years and then often every five years thereafter. Cover can then actually be continued and hopefully that can help maintain any remaining IHT liabilities for as long as it's needed. Alternatively, hybrid approaches are available. You could take a bit of a hybrid approach and combine an element of both guaranteed or reviewable, and that offers some flexibility while still providing a degree of certainty.

Now, with insurance contracts like whole of life cover, it may be possible to increase the amount of cover that the client's insured for if there is a change to their IHT plan. So, for example, if there are IHT liability increases and there may be an opportunity to increase the amount of cover that they have, again, worth speaking with the insurer. What this does is actually gives you as the adviser an opportunity to make sure that any cover the client has is still in line with any liabilities that they've arranged to cover for. And in the case of Gustav, we know that he is in line to face an increased to his IHT liability with the proposed changes.

Now with insurance such as whole of life over and above providing the money for an IHT bill, what role does it play? Well, it's important to understand that the executors of a deceased estate can't actually distribute the estate's assets, which is largely their main job until probate is being granted. That issue being the HMRC may well block probate until that they've been paid their IHT. And if they're not paid within six months, there's often going to be interest applied as well. So, the challenge is where is the money going to come from to pay the IHT when it's due? Well, this is where products like whole of life cover can really come to the rescue because the policy will be written in trust. It means the insurance policy value doesn't inflate the value of the estate. You don't have to wait for probate, and the money can be paid to the trustees to use accordingly. Now, there are various different trusts that we can deal with, and you may well very well be dealing with. But when it comes to putting these solutions in place, typically within this area when we're looking at pure protection policies, term assurance the vast majority of those cases will be going into discretionary trusts.

Now, other trusts certainly have a role to play, and you may well be advising on them, or seeking specialist trust advice on specific cases. But for the likes of the benefits of a life policy, the discretionary trust is often the most simplest and easiest to understand and also the most flexible when it comes to actually ensuring that the money's available, and actually the trustees have got a lot of discretion to use that money to pay whatever they feel that money should be used for.

Now, discretionary trusts do offer that flexibility in managing and distributing assets. It allows the trustees to make decisions based on beneficiaries change in needs. However, they do fall under the relevant property regime, which means periodic and extra charges may apply. So that does add an extra level of careful planning to be required. When we're looking at those potential cost challenges and elements. Again, ultimately really these are charges brought in effectively to make sure there's a bit of a trade-off for the flexibility and control that discretionary trust provides. So, really useful there again, to make sure that we're having those just careful planning discussions around how periodic exit and entry charges may apply.

Now, the trust registration service something I think is really important just to have even just as a little bit of awareness of when we're looking particular protection policies and trust.

Trust registration care service came in a few years back and applies to most UK Express trusts unless they're specifically exempt. And what it means is they do need to be registered with HMRC even if they're not liable to pay tax. There is specific exemptions to certain trusts and one being trusts that hold policies most commonly used with life insurance. And that actually means that unless there's an existing tax liability, most trusts used in protection planning don't need to be immediately registered with the trust registration service. Now, that exemption applies during the term of the policy, but there is a further exemption that applies when a claim happens.

Now, if it's a death claim, the trust is going to stay exempt for two years after death while holding the payout. Trustees will distribute the funds within that time, or after which, register the trust with the trust registration service, HMRC. If it's a critical illness claim then a couple things to think about here. If the proceeds are held by the trustees, they need to register within 90 days. But if the insurer pays the proceeds directly to the beneficiaries, then the trust actually remains exempt.

Okay, so let's move on now to meet Anna. And we can see and hear a few other little bits around Anna's situation.

So, she's currently 55. She's the sole owner of a business valued at £1.5 million. She's divorced. She has two adult children, and as you can see, they do work in the business, but they're not shareholders. Now Anna owns her own home, which is mortgage free and valued at £500,000. So, we also see she's got no current pension provisions.

So, if we look at how Anna's position is going to change from an IHT perspective from April 2026. So currently her business qualifies for a hundred percent business relief. So, there's no potential IHT liability on that. Her nil rate band and residence nil rate band total £500,000, which is the value of her house.

So, provided it's left to her direct descendants, suddenly again, as I said before, we need to check for that, is in fact the intention. Then barring the property value increasing at a faster rate than the IHT nil rate band, she's going to have minimal to no likely IHT charge. Now post April 2026, Anna will only get business relief on the first £1 million of her business assets with the remainder receiving a 50% relief, which as you can see will result in £100,000 IHT bill that she doesn't currently have.

Now, the estate value hasn't changed. She doesn't have a pension to add in, so her nil rate bands aren't impacted. So, for Anna, the issue I suppose isn't really around IHT applying to pensions from April 2027. It's rather more changes to business relief from April 2026. But again, this is all based on her current understanding of the rules, and it may change once we've got further confirmation.

Now if we turn our attention to Anna's situation as we've done so previously, because as well as her IHT concerns, again, she is a business owner, which actually gives you as advisers another business opportunity. Now, as we know, Anna owns a trading business valued at 1.5 million with a new business relief cap coming in from April 26.

She faces a potential £100,000 IHT liability on her estate. Now the solution here is a whole of life policy to cover that liability again, ensures her beneficiaries aren't left with an unexpected tax bill.

Before we address the IHT concern, I want to touch on the business, which for Anna is going to be a significant asset. And it's actually from a continuity perspective, could be at risk if she were to die or actually suffer a critical illness. And this is where business protection comes in. And this could open up a whole area of advice opportunities for you to bring to life with clients. It could include coverage like key person cover. So, if Anna is central to the business's success, her death, her illness could very well have a major financial impact. So, this is where key person insurance provides that financial support, that liquidity to the business to help it cover lost profits, repaid debts, loans. And even help fund recruitment of a replacement, effectively helping to re-sub bench the sub bench.

Now, shareholder partnership protection. If Anna had a business partner or co-owners, then protection could actually be used here to make sure that any surviving owners have the funds to buy her out, buy her share back, keeps the business in the right hands and hopefully provides fair value to her beneficiaries.

And lastly, as it says on screen, relevant life plans. So not business protection per se, but a really good opportunity to bring this type of protection to life if we are discussing protection with business owners. But for Anna, as a director or employee, our relevant life plan offers a tax efficient way for the business to provide any sort of death in service benefits to keep people with employees.

These are effectively single life standalone death in service plans. They're tax efficient; they're not counted as a P 11 T benefit. And again, assuming it's set up correctly, could be eligible for cooperation tax relief.

So here, what I'm trying to get at is don't just focus on Anna’s personal IHT liability, consider the wider business context, assessing the impact of her death or even her illness on the business and her family.

Actually, if we're presenting this as a whole solution, from a personal perspective and the business perspective, it's really going to help build that value that you're delivering, the relationship that you have and hopefully that long term relationship with the client.

So, we've just discussed the importance of business protection for Anna as a business owner. However, again, it's crucial not to lose sight of that personal inheritance tax liability, which stands at £100,000 following that new business relief cap. And as we touched on earlier, one of the main barriers to guaranteed whole of life cover can often be cost. Premiums are higher than that of reviewable policies and some clients may be tempted to look for maybe cheaper alternatives, such as simply saving the money into a deposit account. But how does that actually stack up? How does that option stack up? Well, if we look at the output out on screen here from the Royal London Whole of Life calculator, we can see that for that £100,000 worth of cover, provided through that guaranteed whole of life policy. Again, assuming in this case Anna has a typical life expectancy, a claim on that, a guaranteed whole of life policy might be expected at around about 38 years into the policy term. And we can see that indicated by the orange vertical line on screen.

Now, assuming we found a bank account that paid an annual compound interest rate of 2%, Anna would be about 97 by the time the savings would equal the amount of cover or liability. Now that's not impossible, but the big question is what if something happened before that time? Now, from this graph, there's a couple of other things just to bear in mind and a really important area is the purple section because that is the shortfall in the amount of capital available from savings versus what would be available immediately from the likes of a guaranteed whole of life plan. Of course, if Anna were to save into, for example, a savings account, then the money being accrued will also be within their estate for any IHT calculations, which you can see from the green section on here.

The other thing to point out that is if she did live to 97, as I said, it's not impossible, but what is the likelihood of those savings remaining untouched? It might be tempting to dip in to maybe fund unexpected bills, other lifestyle events that might be going on. Whereas with that whole of life policy, you can't just dip in. And again, there may be the option to increase or reduce the amount of cover if that liability changes.

The real key thing here is the key opportunity is about demonstrating, I guess, the value of advice that you're bringing here, helping clients understand some of these trade-offs and making some of these really informed decisions to ultimately protect their legacy.

Now I want to move on and consider the younger child, Theo.

So, again, much as we've done before, Theo, we can see here he is 45. He's married. He currently doesn't have an IHT problem of his own. And as you can see, he does have a taxable income of £70,000. He's got triplets aged four. He his dad Gustav is keen to help Theo onto the property ladder, and he would like to help him out by giving him £100,000 towards the deposit.

Now they did this for Anna when she bought her property many years back. So, they think it's only fair to do so for Theo. Only, he doesn't want to take it from his drawdown plan as that would give a rise to the higher rate of income tax for Gustav. Plus, as they're the only liquid funds that Gustav has, he'd like to preserve that as much as possible. He would like to help out Theo out of the high-income child benefit tax trap that he's in as well as it's impacting his net income. So, there's a possibility within here too for bringing in Theo's partner for a moment that there could be an inheritance tax coming in from Theo's partner in the future, so one thing else just we might want to bear in mind for a moment.

Okay, so let's go through the same process for Theo as we've done from our previous case studies. So initially here we can see that there's no IHT problem, so we don't need to think too much about the solution there.

He is impacted by the high-income child benefit tax charge, and a pension contribution could help reduce his adjusted net income. Unfortunately, Theo isn't in a position just now to make a sufficient contribution to achieve that. So perhaps a third-party pension contribution by Gustav could actually help here.

Now, we said Gustav wants to help Theo onto the property ladder like he did with Anna, but he doesn't have the liquid funds to do that. So, there's a potential here for Gustav to take an equity release from his property. What that does is actually both free up the funds to make the gift, but it could also have the benefit of reducing the overall estate so it doesn't exceed £2 million, and that in itself could regain some of that lost residence nil rate band.

Gustav is keen to kickstart pension savings for Theo's kids as well. Again, much like he did for Anna's when they were young. So that third party pension contribution might help here too, but it's more likely to be a regular premium benefit to benefit from pound cost averaging.

Now there will be interest charge on the equity release if it's taken out and that could increase the debt over time. So, this does need to be discussed, but again, potentially a conversation worth having with the whole family. And finally, if Theo is gifted £100,000 from his dad, that is going to be a PET. If Gustav dies within a seven-year period, that PET will fail, so that needs to be protected and it's likely a protection policy will be needed for that.

But because the gift falls within the nil rate band, actually here a gift intervivos cover wouldn't be suitable. So here, and what we would look at is a seven-year term policy, which often would be more suitable. So, let's look at all these things in a little bit more detail.

Okay, so if we begin with, let's begin with equity release and I expect this to become a much more regularly used tool as more people are being brought into scope of IHT. I think here there's going to be a greater incentive to gift to try and minimize that IHT charge and where there is lack of liquidity to do this, equity release can be really helpful. It can also present an opportunity to pass inheritance during the donor's lifetime and actually therefore enable them to see the recipient being able to benefit from it.

You could put it a nice way and say it's actually like gifting with a warm hand as I've sometimes heard it called. So, equity release can provide that £100,000 lump sum tax free that Theo needs. Now once that Gustav gifts this lump sum to Theo, the amount gifted will potentially be that potentially exempt transfer that PET, as it isn't between spouses or civil partners, and it doesn't meet the gifts out of normal expenditure exemption either.

Now if the donor lives for seven years after making that PET, it will be out with the estate for IHT purposes. When the donor dies, within seven years of making that PET, the PET is deemed to have failed, and it falls back into the donor's estate for IHT purposes. I just want to cover that in case anyone who hasn't dealt with IHT issues much in the past potentially was unclear around what I mean by a PET failing.

Now as equity release is a loan, interest accrues on the debt, now there's usually options for the interest to be paid on the debt or for it to be added to the loan and paid when the borrower dies or even maybe moves into to long-term care or if the property is sold. So, it is likely that there would be a conversation with Gustav, Theo and Anna altogether about this. And it may be that one or both of Theo and Anna choose to make the interest payments on the loan to actually prevent that debt increasing.

Another point I think's worth raising here is that a debt against the property can reduce the value of the estate, and that could have advantages if the estate is nearing that £2 million mark where the residency nil rate band starts to taper. And as looks likely for Gustav when pensions become subject to IHT in April 2027, it won't necessarily solve the issue immediately as the PET would fall back into his estate if it failed, which is why it's so important to cover that PET with a protection policy.

And actually, just on that point, something that we've been fielding a number of questions, of late anyway, is around protecting PET. And I think that certainly does warrant a little bit of further explanation. One of the areas that we do often see some confusion, is around which policy would be best suited to cover the danger of a PET failing, which again, once again means that the donor has died within that seven-year period having made that gift. In some instances, what we see anyway, there is often an assumption that the correct solution is automatically a gift intervivos cover. Not only is that not correct, but it could actually result in poor outcomes for customers. If the gift fails or falls into the nil rate band for sorry for IHT, and the donor dies within the seven-year term and the PET fails, it'll fall back into the estate, and it will use up the amount of the nil rate band equal to the failed PETs.

Now, failed PETs are the first thing to use up the nil rate bands, something else to bear in mind. In Gustav's scenario, the PET that Gustav made won't face an IHT charge as it is within the nil rate band, but it will mean any other money is going to be subject to IHT that wouldn't have been used or wouldn't have been had the nil rate band been available.

So if the PET failed, the whole IHT charge would be levied on the full value of the assets that are no longer falling within the nail rate band because that PET, again failed, has used up and as the fuel IHT charge on the fuel value of the PET would become payable, even if it failed in year six. Here, a level term policy would be needed.

So just to summarise this, if the PET is within the nil rate band, a level term policy is most likely to be suitable. When a PET is made that is above the nil rate band, so our second scenario, there would be an IHT liability, but the tax charge levied on that failed PET reduces from year three after the PET was made. Okay? And it would be gone altogether from year seven. Now, as a PET in these circumstances would incur that IHT if it fails as it's above any nil rate band, but that tax charge would again reduce from year three. Here in this scenario, a gift intervivos cover would be more suitable as it's going to match that tapered liability.

So again, just to summarise this, if the gift is over any nil rate band, then a gift intervivos cover is going to be the more suitable option. Based on this as the PET Gustav makes to Theo falls into that nil rate band, a level term policy would be the most suitable solution here to protect the danger of that PET failing.

Now saying all that, I do think it's still worth just exploring how gift intervivos cover works if the PET is above the nil rate band because it's certainly something that happens quite a lot and there is a little bit more detail involved here. So, these policies, i.e. gift intervivos cover policies, they have a fixed seven-year term. Cover reduces in steps to match the reduced liability as that taper relief takes effect.

Now, although the cover reduces, the premiums will typically stay fixed for the whole seven years. And don't forget here that taper relief applies to the amount of tax, not the value of the gift.

However, before we set up a gift intervivos policy, it is essential to establish whether or not taper relief will actually apply much, as we've just explained a moment ago.

If the PET, again, is within the nil rate band, gift intervivos cover is not going to be much use. When a PET made is above the nil rate band, a gift intervivos solution would be applicable is it matches that liability.

Now the market for gift intervivos, there aren't many providers out there that offer gift intervivos cover, but there are alternatives and it's something that you may well have never thought of before.

Now, instead of actually using a gift intervivos product, you could consider building a multi-cover plan made up of a group of five level term assurance covers to effectively replicate a gift intervivos product. Now, these five covers run alongside each other with a term of 3, 4, 5, 6, and seven years respectively. Each cover will then be set at one fifth of the liability, so you can see that on the right-hand side of the screen.

So, in the example from before, that £100,000 gift from Gustav exceeded his nil rate band by £100,000. So, we would arrange each of those five covers, again at £8,000. And what this is going to do is it's going to provide the full cover of £40,000, which is five covers at a sum assured of £8,000 from day one, and for the first three years, at which point the first policy will cease. Thereafter, the total cover provided is going to decrease by £8,000 each year as the next policy in the multi-plan reaches its full term. So, at the end of year three, you've got four covers left, giving £32,000 worth of cover. At the end of year four, there's three policies giving £24,000 worth of cover and so on and so on. You can get the story there.

Now what this does is actually the reducing cover, still matching the reducing inheritance tax liability in the same way that a gift inter vivos policy does. Here there's an added benefit in that the premiums that the individual is going to be paying also reduces each year after year three, because each of those individual covers will fall out of the Multicover plan. They're going to cease, and that can play a big assistance in helping to reduce the overall cost.

Couple of questions on the bottom there. So, who pays the premiums on gift inter vivos cover? It could be either the donor or the recipient. It's ultimately going to be something that needs to be agreed through your client conversations. Typically, though it's going to be the donor. But as I said, it could be either.

Also, something else to bear in mind with regards to the residual estate. Now, in addition to setting up the gift inter vivos cover, you should also consider what liability remains on that residual estate as the nil rate band has been used up. The beneficiaries of the rest of the estate have that increased liability until the gift falls out of the estate and the full nil rate band is available, but that's going to be in seven years’ time. Now, unless the rest of the estate would be exempt from IHT, for example, because it's been left to a spouse or a civil partner, they really should be considering covering this liability by the means of a level term assurance policy. As again, taper relief doesn't apply to that sum assured. So just something else to bear in mind when we're looking at the residual estate and actually multi-cover plans do allow that additional cover to be included within there.

Now if we take a moment just to explore another solution here, and this is the joint life second death term, a product that is gaining a lot more traction in the estate planning conversation, particularly in light of a lot of these shifts with regards to IHT legislations that we've touched on today.

In the case of Theo, remember earlier we mentioned that there's a potential inheritance coming to his partner in the future. Now, again, back in that case of Theo, one of the, I think a further business opportunity could be to consider the role that a joint life second death term solution might offer.

We know he is married and with the partner potentially expecting that inheritance from a relative in the near future, that in itself could present a challenge with regards to the value of their estate. Now, joint life second death term is designed to pay out only on second death as the name suggests. But it's about aligning with the strategy of being able to make sure that for that IHT liability, that will typically crystallise where for married couples or civil partners. Now that timing is going to be really crucial because it gives clients a bit of breathing space to try and think about other more comprehensive estate planning strategies that might be worth implementing without the pressure of immediate tax settlement.

From an efficiency standpoint, these types of products are actually very well placed in the IHT planning space. Again, it's especially relevant for couples who plan to leave assets to each other on first death. Even where we're thinking about the spousal exemption, applying the real tax exposure, of course arising on second death. And that's where this type of cover really steps in to be quite targeted and very much timely.

For clients with large estates, but often limited liquidity, joint life second death term can be a cost-effective alternative to a whole of life policy because it allows them to ensure against that known liability without disrupting any of their other investment strategies or maybe having to sell off assets prematurely.

And lastly, just echoing something we've looked at a lot today around this change in mindset. You know, there are this IHT net is certainly going to be widening, whether that's through a lot of the announcements that we've seen or what we're still waiting to hear about. I think what this is doing is starting to prompt advisers to start thinking about different solutions to mitigating some of these IHT liabilities from some of the more traditional methods and joint life second term really is a solution that can play a really important role in this new landscape. So, with that in mind, I have looked at a few quick detailed areas with our case studies. I'm going to pass back over to Justin just to take us through the remainder of the webinar today.

Thanks for that, Gregor.

Okay. Let's have a look at a few other options for Theo and his family. And this will involve pulling together several tax planning angles. So, this isn't just useful for IHT mitigation, but you know, it has other tax benefits too.

Look, we know that Gustav is 75 and he has an income drawdown plan. He currently only takes ad hoc income from this. Between his state and private pensions, he's got enough income to meet all of his regular expenditure. So, he has sufficient disposable income, but from April 2027, a likely increased inheritance tax problem. Now we also know that Theo is currently being hit by the high-income child benefit tax charge, which effectively cancels out some of the child benefit he receives. The child benefit is currently £26.05 per week for the eldest child, and £17.25 for each additional child. Theo will need to pay a child benefit tax charge of £1,574.30; it's 50% of the total child benefit that he pays. And that means, okay, that for the £10,000 that Theo earns over £60,000, he has an income tax charge of £5,574, or nearly 56% if you prefer.

He knows pension contributions would be a good way to escape that tax trap and reduce his adjusted debt income. But hey, he's got three young kids. He doesn't have any disposable income to be able to do that. However. With pensions coming into scope of inheritance tax from April 2027, Gustav's adviser has suggested that he might want to increase his withdrawals from his income drawdown plan, remember, he doesn't take much out of it at the moment, to enable him to make gifts out of normal expenditure. This is currently a somewhat of a lesser used IHT exemption, but could have multiple benefits, as we're about to see. Now on top of the child benefit tax trap issues that you know, Theo's facing, Gustav, his dad knows that his grandchildren are far less likely to have the benefit of a final salary pension like he did, so he decides to save money into a pension on their behalf.

Now, in the interests of family fairness, we'll assume that Gustav did something similar for Anna's children while he was still working as well. Now the maximum that can be contributed into a pension for somebody with no earnings is £2,880 per annum net, okay, so £3,600 gross once we include basic rate tax relief, so Gustav will contribute £2,880 a year into the pension for this set of grandchildren until they reach 18.

Contributing the maximum amount into a pension for these grandchildren is going to reduce the value of Gustav's estates coming out of his pension, which is going to be subject to IHT whilst building up a pension for his grandchildren. Now, Gustav increases his income drawdown withdrawals to fund this. Since the payments are regular, they're from income and they're not going to reduce Gustav's standard of living. They can be classed as normal expenditure from income exemption. And of course, his adviser's going to keep evidence of that plan on his record and the intentions of that in case it was ever challenged in the future.

Now by doing this, okay, there is an IHT saving of £3,456. We get to that by three times the £2,880 is £8,640. 40% of that is £3,456. Now, at age 18, the triplets will have £81,576 each in their funds. And this is calculated using a growth rate of 5% net of charges. But do you know what? Even if Gustav stopped the contributions when the triplets turned 18, by the time those triplets were 60, there would be £633,089 in each fund, based on the same growth projections that we're talking about, 5% net of charges, without those triplets contributing another penny. Okay.

Now, by the way, working as I do for a pensions company, I'm not suggesting that they don't make any further contributions, but that's what would happen. Now one key point to remember is that a parent must know about a pension set up for a grandchild. And that is because the parent should be signing the application form. They are the only person who can make a relief at source declaration. Okay? So, you don't want each set of grandparents arguably, you know, setting up £3,600 gross a year, and of course finding out that they're breaching the law.

Now, the other key point just to touch on there is that the reduction to Gustav’s estate is the net contribution that he makes of £2,880 for each child, not the grossed up £3,600 figure. So just be mindful of that when you're working out the IHT reduction.

Okay so what else can Gustav do? What about Theo? Okay. Remember we discussed earlier that for the £10,000 that Theo earns above £60,000, that's where high-income child benefit tax charge starts to kick in these days. So, the £10,000 above £60,000, he incurs tax charges of £5,574, 56% roughly there, you know, if you prefer. Now with Gustav, with him making increased drawings from his income drawdown plan, if he ups those a bit further and he's got scope to do so, okay, there's also scope for him to make an £8,000 net contribution into Theo's pension, and that's got multiple benefits.

Okay. Firstly, it gets £8,000 out of Gustav’s estate for IHT purposes, what we'll do after 2027 when pensions are subject to IHT, and that is a £3,200 IHT saving (40% of £8,000 = £3,200). Plus, the £8,000 pension contribution will be grossed up by basic rate tax relief to £10,000.

And of course, what that does is it reduces Theo's adjusted net income by £10,000 from £70,000 down to £60,000, meaning that he's no longer impacted by the high-income child benefit tax charge. And as we can see, that's going to save him £1,574, the amount of what the tax charge was. On top of this, Theo, as the recipient of the pension contribution that Gustav made, okay, but Theo's the recipient of it so he can claim the higher rate tax relief due, which will be a further £2,000. So, if we add all of that together, we've got the £3,200 IHT saving, we've got £4,000 of basic and higher rate tax relief, plus the removal of the high-income child benefit tax charge, that can add in a further £1,574. And if we add all of that together, okay, and I'll save you doing it, I'll tell you, that's a total saving of £8,774. And if we divide that by the £8,000 net contribution that Gustav made to enable all of this to happen, we'll see that that's an effective tax rate of 109.7%. Okay. Yes. Some of that is pure IHT mitigation. Other parts are just good intergenerational tax planning. And do you know, with the coming changes, I think it's more likely that strategies like this will be employed in the future.

Clearly, we need to keep an eye out for anything that happens in the budget on the 26th of November. To see if any changes are made around gifting exemptions or anything like that. So please go back and visit the Royal London Technical Central website to keep an eye on that. But otherwise, this looks very much an effective solution in some instances.

Okay, let's finish up by looking at the impact on beneficiary's income when they inherit a pension pot and that pot is subject to inheritance tax, and actually to income tax as well. Now this time we're not using Gustav and his family, but some of the points we cover could easily be relevant to people in their situations.

Now, understandably, the main focus since the announcement that pensions were no longer going to be exempt from inheritance tax from April 2027, has been the potential IHT mitigation strategies for your clients. Okay. But what has maybe been forgotten about or certainly it's not something I've seen mentioned a lot in the financial press, is the impact on your clients’ inheriting assets after April 2027. So, they're the beneficiary, many clients will inherit from their parents after April 2027. Okay? We know that people are inheriting, or people are dying later and later, and therefore people are inheriting money later and later in life. And if their parent is over 75 in fact 75 or over actually when they die then there could be implications for your client's income tax as well.

Now, remember on death over the age of 75, any inherited pension benefit will be subject to the beneficiary's marginal rate of income tax and therefore it's imperative to check what your client's parents have planned as well.

So, what we're showing here is the impact on income of four different people inheriting a £100,000 pension pot for somebody who died age 75 or over. So, we are assuming that there is no IHT mitigation strategy in place just for simplicity, so there will be a 40% inheritance tax charge applied to the £100,000 pension pot that they're inheriting. So even though it is perhaps a relatively modest inheritance of £60,000 after inheritance tax has been paid, there can be considerable knock-on effects for the beneficiary.

So, what we've got here are four different scenarios. You can see Client A who's on £35,000 a year, Client B on 60, Client C on £100,000, and Client D on £150,000. Now as you know, the £60,000 inheritance net of IHT will be treated as income and therefore you would expect Client D would end up with the highest income tax charge as they're already a 45% taxpayer, but that's not necessarily the case.

Client A would receive £39,054 net from that hundred thousand inheritance, an effective tax rate of 61%. Okay. Client D will receive £33,000 net, so we're talking about 67% tax rate there, but Clients B and C have been impacted even more as both have ended up losing either part or all of their personal allowance. Client B receives £32,000 net with an effective tax rate of 68%. Client C only £29,229 or whopping 71% tax rate. And you know what, let's take that a step further and consider if Clients A and B are perhaps in receipt of child benefit. Okay? Let's just assume that they both have two children and so they're getting in the 25-26 tax year £2,251.60 in child benefit.

Now incidentally, the reason that I've said it's not applicable for Clients C and D is that their salary's already above the point that they would've lost all of their child benefit or not lost it, they accrue a tax charge that's equal to it, but it's, I guess it's down to amount to them to losing it.

Now both Client A and B will receive the high-income child benefit tax charge equal to their child benefit as their income level is now above £80,000. You can see that in the second row down, the effective incomes once we take off the IHT at £95,000 and £120,000 respectively, and their new net income is now £36,802 and some change and £29,748 respectively with Client A effectively having a tax rate of over 63% and client B 70% on that inherited lump sum of £100,000.

So, what can we do to help? Well, one option is instead of taking a lump sum, that the benefit is paid over several years via beneficiary drawdown, just to help spread out that potential income tax charge. Now, we always hark on about making sure the expression of wishes form, or the nomination of beneficiary form is kept up to date for your clients, as that can delay the payment of benefits and can impact the payment options available for their beneficiaries.

And this is equally important for your client's parents. Firstly, your client's parents need to check if the pension scheme they're in allows for beneficiary drawdown, as not all pension schemes do. And if it doesn't and they die, then there won't be an option for beneficiary drawdown.

Now second, if there is an existing dependent, so for example a spouse, okay, your clients, so their children, need to be named on the parent's expression of wishes form. Otherwise, the only option is a lump sum, with all the negative consequences that we've just seen in this table of what that can do from an income tax perspective. Now, another alternative is for the client to pay a pension contribution, which will reduce their adjusted net income. Clients A and B could receive potentially their full child benefit as their high-income child benefit charge may no longer exist once they've paid a contribution and reduced their adjusted net income. For clients B and C, they could recover some or all of their personal allowance. And of course, for all clients, it's going to help satisfy a later retirement income need as well. I won't go into any more detail on that as we've just shown how this can work in Theo's case study as well.

Okay, we're just about the end of the session today. So just by way of a summary, in today's evolving advice landscape, no adviser can or should operate in isolation. The gravity of collaboration is pulling us to a more integrated, multidisciplinary approach, and that's a good thing. You know, the slide you'll see here illustrates the adviser at the centre of a constellation of professional connections, estate planners, mortgage brokers, accountants, solicitors, equity release specialists, and of course protection experts.

Each of those bring a unique lens and skillset that can elevate the quality and breadth of the advice that you offer. Why is this more important now than ever? Because client needs are becoming more complex. Whether it's navigating intergenerational wealth transfers, structuring business protection, or aligning estate planning with pension strategies, advisers need to tap into the expertise of others to deliver a truly holistic solution.

And you know what? It isn't about outsourcing responsibility. It's about enhancing capability. By leaning into these professional relationships, advisers can unlock new opportunities, mitigate risks, and ultimately deliver better outcomes for clients. So, the challenge I'd pose is this, okay, who's in your orbit? Are you making the most of those gravitational pulls to strengthen your advice proposition? And if not, well now's an opportunity to do something about it.

Lastly, we have some planning points here. Keep up to date with those changes. I know there've been lots in the past few years, but not keeping up to date with them risks falling foul of that consumer duty rule of avoiding foreseeable harm. Make sure the scheme offers the required options, beneficiary drawdown anyone? and that those expression of wishes forms are kept up to date. Don't overlook protection. It's going to be far more important for far more people once these changes take effect and involve beneficiaries parents as soon as possible, well beneficiaries and parents really as soon as possible, and have the opportunity to place yourself at the heart of this and become indispensable to the process. And to engage with insurers and the expertise they have to offer, particularly if protection strategies to help with IHT bills aren't something that you've dealt with a lot in the past.

Okay, that's all we've got time for. Let's have another look at the learning outcomes. Hopefully you feel that we have met those. Sorry, it's a little bit over time and that really just leads me to say thank you very much for your time. I hope you found this useful. Do remember, if you're looking for further information, visit our technical central website and/or speak to your usual Royal London contact who will be more than happy to help.

Shortly you'll get the option to answer the CPD questions and that will automatically generate your CPD certificate. Thank you very much for your time and we look forward to you joining us again for a future webinar soon.