The 2024 UK Budget introduces a significant change to inheritance tax (IHT) rules that could reshape financial planning for family business owners. From April 2027, pensions will now be included under IHT assessments, posing new considerations for those aiming to pass on wealth efficiently. For many, pensions have been a key component of inheritance tax planning, but these changes mean it’s time to reassess how retirement savings factor into broader legacy and succession strategies.
What’s Changing With Pensions And Inheritance Tax?
Until now, pensions have been exempt from inheritance tax, allowing individuals to pass on retirement savings to loved ones without additional tax burdens. However, starting in April 2027, pensions will fall within the IHT regime and be subject to a 40% tax rate in line with other assets. There has been no change to the inheritance tax threshold of £325,000 with assets within this threshold incurring no tax liability. This shift may impact retirement and succession planning for family business owners who were counting on pensions as part of their wealth transfer strategy.
What Family Business Owners Should Consider
With pensions going to be subject to IHT, family business owners should consider taking a fresh look at their financial plans. Here are some essential steps to consider:
Reassess retirement and wealth transfer plans
Pensions have traditionally offered a tax-efficient way to pass on wealth, but the new IHT rules will change that dynamic. Assessing the impact on your estate and understanding how these changes will affect both personal and business assets is key. Calculating potential tax liabilities now can help you determine if new strategies are needed to protect your family’s legacy.
Consider alternative wealth transfer strategies
With pensions now facing a 40% tax rate, family business owners may need to explore other options, such as trusts, lifetime gifts, or asset restructuring. Each strategy has different implications, so consulting a tax or wealth adviser who understands family businesses can be invaluable in selecting the right approach for both personal and business goals.
Prepare for business continuity
The added IHT on pensions may create a need for liquidity to cover tax costs, which could otherwise place pressure on the business. Developing contingency plans—such as setting up insurance policies or creating a reserve fund—can help prevent the need to sell business assets, ensuring smooth generational transitions without disruption.
Looking Forward
Although the changes to pensions and inheritance tax present new challenges, there are ways to navigate these shifts effectively. By taking the time to review financial plans, exploring alternative wealth transfer strategies, and ensuring adequate liquidity for potential tax costs, family business owners can protect both their legacy and their business’s stability.
With thoughtful planning and the right guidance, family businesses can continue to thrive across generations, adapting to the new tax landscape while safeguarding their future.
About the Author - Jeff Simpson is a Chartered Financial Planner at Hymans Robertson Personal Wealth. Find out more by visiting their website here The contents of this article is for general information purposes only and should not be regarded as financial advice. It should not be considered a substitute for regulated advice on specific circumstances and objectives.
Watch an on-demand webinar, where Jeff Simpson from Hymans Robertson Personal Wealth and tax expert Anthony Whatling from Alvarez & Marsal, discuss the various outcomes of the Autumn Budget and their implications for family business owners. It is for general information purposes only and should not be regarded as financial advice. It should not be considered a substitute for regulated advice on specific circumstances and objectives.
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