How to protect your wealth from inheritance tax

The inheritance tax regime is changing but don’t panic – plan. Here’s how…

The Chancellor’s Budget featured many ambitious promises, bold changes, and, of course, cuts. Among these was a reform to Inheritance Tax (IHT), which is the levy applied to the estate of someone who has passed. 

By bringing inherited pensions into the scope of IHT, as well as fundamentally altering how agricultural and business assets are treated, the landscape of family wealth transfer in the UK is materially changed.

While it’s natural for people to worry when tax changes come into place, especially when it affects what they’ll be able to leave to their loved ones, it’s important not to panic and instead take action and start thinking differently about how you plan to protect your wealth for the future.   

Unspent Pension Pots 

The headline news is that “from 6 April 2027 most unused pension funds and death benefits will be included within the value of a person’s estate for Inheritance Tax purposes”.

For years, we in the UK have been encouraged to build our pensions, but with this new tax landscape, is maxing out pension contributions still the best choice? Or is it time to look at alternatives to make our money work harder?

Obviously, everyone has different risk appetites, but with the vast array of alternative investments available – from commercial property to resources, equities and fixed-income options – there will be options that suit you. The taxable amount on investments may be lower than what would be applied to a pension, potentially allowing you to preserve more wealth for future generations. The key is to start small and build up gradually, finding what works for your comfort level with risk.

Right now, with markets rocking from the Budget waves, working closely with financial advisers and portfolio managers is the best way to ensure you’re protecting your wealth. They can take a holistic look at your wealth and assets to help you rebalance, seek out tax-efficient strategies and build a portfolio designed to stand strong through market volatility. 

As Inheritance Tax changes reshape the financial landscape, it’s time to consider whether a more diversified, investment-driven approach could better secure not only your future, but the future of your loved ones once you’re gone.

Exploring Alternative Investments 

The Budget has brought some unwelcome news for those investing in the Alternative Investment Market (AIM). The chargeable amount on most AIM shares has now increased to a flat rate of 20 per cent, which is frankly, better than many in the industry were expecting. Still, it definitely makes AIM a less attractive option for investors looking for high returns outside of the traditional stock market.

Given these changes, it’s worth exploring other investment options that could maintain similar returns. For sophisticated investors and those already comfortable with AIM investing, consistent yield alternatives like Fixed Income Bonds present opportunities to protect and grow your wealth.  

Exploring alternative investments can play a crucial role in diversifying your portfolio, helping safeguard your family’s financial legacy while potentially delivering the robust returns you’ve come to expect from AIM investments. 

Strategic Planning in Uncertain Times 

Market changes often trigger knee-jerk reactions, but hasty decisions rarely serve long-term interest. 

The best way to protect your wealth against government changes and market instability is through diversification, and this remains true in the wake of the budget. Having a well-balanced investment portfolio, which holds a combination of different assets, minimises risk while potentially providing a steady return on investment. 

The obvious reaction to the increase in stamp duty, for example, might be to completely remove property from your portfolio. However, instead consider strategic timing of property transfers, use of property investment companies, development opportunities and commercial property investments, which allow you to continue investment into the UK’s strong property market, while taking on less risk and cost associated with buy-to-let. It’s not that all property is a non-starter, but instead that different ways of investing in property merit careful consideration in your wealth preservation strategy.

Embracing Diversification 

The new rules don’t close all doors – they simply require more sophisticated planning. By combining various strategies – from business structuring to investment diversification, from lifetime giving to PE investment – families can create robust wealth preservation structures within this new tax framework. 

Jake Webster is managing director of The Seventy Ninth Group