At our recent inheritance tax webinar Paul and Matt covered what IHT actually is, what the main allowances are, explained some of the common misconceptions, and looked at the upcoming changes to IHT coming in April 2027. You can find out more in our latest article on this ‘The 2027 inheritance tax changes your family needs to know about’.
We also had a number of interesting questions from our attendees during the event, which was great because some of the rules sound simple until you try to apply them to your own home, savings or family. So we decided to share those questions and answers here, because this is where the details really matter.
What counts as part of your estate?
One attendee asked whether ISAs are outside your estate for inheritance tax. They aren’t. You won’t usually pay Income Tax or Capital Gains Tax on money held in an ISA, but its value normally forms part of your estate when you die. It’s easy to see why people might expect a tax-free account to be exempt from inheritance tax too, but the rules are different.
Trusts prompted a similar question: are assets in a trust always outside your estate? Again, the answer is no. The inheritance tax treatment depends on the type of trust, what you put into it and whether you still benefit from the assets. There can also be tax charges when assets go into a trust or while they’re held there.
That doesn’t mean trusts can’t be useful. They may help if you want to provide for someone while having some say over when they receive the money. But putting assets into a trust isn’t, by itself, a way to make an inheritance tax concern disappear.
How much can you give away?
There’s no fixed limit on the amount you can give to another person under the seven-year rule. If you make an outright gift and live for seven years afterwards, it will generally fall outside your estate for inheritance tax. If you die within that period, the gift may still be taken into account.
There’s another important detail which is that you have to genuinely give the asset away. If you put your house in your children’s names but continue living there without paying a full market rent, it may still be treated as part of your estate. Matt mentioned this during the webinar because it’s the sort of idea people hear from friends or come across online and assume it works.
For smaller gifts, there are exemptions that don’t depend on surviving seven years. Each person has a £3,000 annual gifting exemption, so a husband and wife can each give £3,000 to the same person. There’s also a small-gift exemption: you can give up to £250 to as many different people as you like in a tax year, provided you haven’t used another gifting exemption for those same people.
Matt also talked about regular gifts from surplus income. If you consistently have income left after meeting your usual living costs, you may be able to give some of that away without the seven-year rule applying. The gifts need to meet HMRC’s conditions, and keeping clear records of your income, spending and gifts matters.
Of course, knowing what the rules allow is only half the conversation. You might have more to spend later in retirement than you expect, or you might decide you’d like to use some of your money for travel, your home or your own care. We look at what you can afford to give before deciding how to give it.
Who will inherit your home?
Another attendee asked whether the additional inheritance tax allowance for a home would apply if they left their property to a niece. Generally, it wouldn’t. The residence nil-rate band is available when a qualifying home passes to direct descendants, such as children or grandchildren. A niece doesn’t meet that definition.
This is one reason the often-quoted idea that a couple can leave £1 million free of inheritance tax needs some care. It assumes the relevant allowances are available and can be used in full, but who inherits the home, its value and the value of the wider estate can all affect the answer.
We also had a question about a second house on farmland. Being on a farm, or on the same deed as agricultural land, doesn’t automatically mean a residential property qualifies for agricultural relief. The property and the way it’s used would need to be considered in detail. It’s a good example of a question we can only really answer once we understand the person’s circumstances.
What changes for pensions in April 2027?
From 6 April 2027, most unused pension funds and pension death benefits will be brought within estates for inheritance tax purposes. This could make a considerable difference for people whose plans have been built around leaving their pension untouched and passing it on to family.
Matt used a simple example in the webinar. Imagine a couple who, when the second of them dies, leave a £600,000 home, £400,000 in cash and investments, and £700,000 in pensions. Under the current rules, the pension would generally sit outside the estate for inheritance tax. Assuming the full £1 million of combined allowances is available and there are no other complications, there would be no inheritance tax on the £1 million made up of the home, cash and investments.
Under the rules due to apply from April 2027, the pension would also be counted. On those same simplified assumptions, £700,000 of a £1.7 million estate would exceed the available allowances, producing an inheritance tax bill of £280,000.
That’s a simplified example, but it shows why it’s worth checking how the change could affect your family. It doesn’t automatically make taking money out of your pension the right move: you could pay income tax on the withdrawal, and you may need that money later. It’s something to look at alongside the rest of your retirement plan.
Could insurance help your family pay the bill?
Someone also asked whether whole-of-life insurance could cover an inheritance tax bill. It can provide money to help your family pay one if the policy is arranged appropriately. The insurance doesn’t remove the inheritance tax liability; it gives your family a potential source of funds to meet it.
That might be helpful if much of your estate is tied up in your home or other assets that your family wouldn’t want to sell quickly. Whether it’s worthwhile depends on the cost of the cover and what other options you have.
What should you do now?
Paul began the webinar with a point we always come back to: before making plans to give money away, we need to understand what you’ll need for yourself. That gives us a starting point for answering the tax questions in the context of your life.
You don’t need to work through every inheritance tax rule on your own. If one of these questions made you pause, bring it up at your next meeting with us. We can check how the rules apply to your assets, your family and the plans you already have in place.
Please get in touch if you have any questions of your own.
