Inheritance tax planning after April 2026: trusts, pensions and life insurance

Ahead of the changes to inheritance tax (IHT) which were brought into force on 6 April 2026, there was a focus on potential estate planning around agricultural and business assets. This article looks at three other key areas which merit review not just by landowners or business owners, but all families concerned about their estate planning and IHT in an increasingly uncertain national and global climate.

IHT planning through trusts

Even individuals who do not hold significant agricultural and business assets should still consider whether a lifetime trust could provide an effective and tax-efficient vehicle for holding family wealth in an asset protective, flexible wrapper.

Every individual is able to transfer assets up to the value of their available nil rate band (a maximum of £325,000) into a trust without facing an upfront charge to IHT, meaning a couple could put assets worth up to £650,000 into a trust without any IHT. The nil rate band refreshes every seven years so the trust could be topped up by another £650,000 at that point. Any increase in value in the trust assets is outside the donors' own estates.

Lifetime trusts are not subject to the 40% rate of tax on the death of the trust's creator. Instead, they are subject to a separate regime. Broadly, there are IHT charges every 10 years and on distributions of capital, at a rate of a maximum of 6%. Importantly, trustees will have certainty about when those IHT charges fall due, rather than having to plan for a more significant, unexpected liability on death. Tax advice should always be taken before creating a lifetime trust.
The three main benefits provided by a discretionary trust are:

i. Flexibility: the trustees can adapt to the prevailing circumstances at the relevant time.

ii. Asset protection: trust structures can help shield inheritance from divorce settlements, bankruptcy or creditor claims, poor financial management, addiction issues or other vulnerability.

iii. IHT mitigation for beneficiaries: although discretionary trusts fall within their own tax regime, they can still be tax efficient by holding assets outside the beneficiaries’ own estates, allowing trustees to distribute funds in a way that minimises IHT exposure and enabling long term family wealth planning.

In the right circumstances, trusts can help keep family assets available for multiple generations rather than crystallising tax charges upon each individual's death and so should be considered as an estate planning option, even now we are beyond 6 April 2026.

Life insurance to fund IHT liabilities

With more individuals paying IHT each year, life insurance is playing an increasing role in providing funding for paying IHT bills on death.

Most commonly, we are seeing clients taking out joint lives / second death life insurance policies to cover some or all of the expected IHT exposure on the second death. Depending on your age and health, these can be an effective and affordable way to plan for IHT; they can be particularly useful for individuals who are 'asset rich, cash poor' as the policy proceeds can provide the required liquidity to pay the IHT bill when it falls due and avoid the high rate of interest charged on IHT paid in instalments.

It is important to ensure any such life policy is properly written into trust so that the policy proceeds are not themselves subject to IHT. Legal advice should be taken on this.

Pensions and IHT from April 2027

The current position is that pensions and death benefits sit outside the net of UK IHT. From 6 April 2027, that position is set to change such that most unused pension funds and certain pension death benefits will become subject to IHT (at 40%).

Previously, it was commonly advised that retirees should spend from investments, ISAs and other savings first, preserving as much of their pension pots as possible as they could be passed on to their heirs free of IHT. This will no longer be the case from April 2027, and in the next 12 months everybody should review their pension arrangements and, if necessary, take professional advice on the most efficient strategies for dealing with their pensions. There are potential traps for the unwary, especially for individuals who die over the age of 75 with an unused pension fund: their heirs may potentially be subject to IHT on the value of the fund (at 40%) and subsequently subject to income tax at their marginal rate on withdrawals from the fund (up to 45% for additional rate taxpayers).

One potential strategy we are seeing is taking one's available tax-free lump sum in order to make lifetime gifts to beneficiaries. If you survive for seven years from the gift, it falls outside the net of IHT and no income tax is charged on it. Another is individuals drawing down on their pensions and using that income to make gifts to children/grandchildren. This can be especially effective because gifts proven to be from surplus income pass free of IHT and do not come with a seven-year tail. While there are planning opportunities here, pensions and IHT are both complex areas and so specialist advice should be sought.

Whilst pensions and death benefits will be taxable from April 2027, they will continue to pass outside the terms of your will. It is therefore important to check with your pension administrators that beneficiary nominations are in place and up to date.

Reviewing your estate planning after the 2026 and 2027 changes

Whilst the date of 6 April 2026 was key for individuals holding business and/or agricultural assets, it is nonetheless a good opportunity now for everyone to review their estate planning particularly ahead of further change in April 2027 to the taxation of pensions. This article has pointed to a few key areas which should still be considered as part of wider estate planning, in conjunction with your professional advisors.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2026