Is inheritance tax planning now a midlife pursuit?

If you asked a sample of midlifers to share their main money concerns, tackling an inheritance tax (IHT) problem will likely be way down the list – for most it probably won’t even feature.

Aside from hoping we still have several decades ahead of us, our forties and fifties are characterised by more pressing financial matters: chipping away at an outstanding mortgage, saving for a comfortable retirement, and striving to support children – all while trying to balance enjoying life today. Seeking to swerve taxes on death is a headache for our future selves to worry about, and some may consider it a nice problem to have.

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Even though IHT may not be front and centre for this cohort, it will soon edge into the conversation for more households - and not just the ones sitting on lots of wealth. The combination of prolonged, frozen tax-free thresholds and rising asset prices is clawing more families into the IHT net.

On 6 April 2027, the numbers will vault overnight, as most pensions lose their IHT-exempt status, meaning any unused funds will be included in the estate calculation and, unless covered by certain exemptions or falling within allowances, face a hefty 40% tax rate.

The long and short of it is that individuals and families with modest homes and modest pension pots could leave loved ones with a stinging HMRC bill on death. The societal rise of cohabiting versus getting married thickens the plot further, as IHT rules are more favourable to some family situations than others.

We’ll dive deeper into the most vulnerable groups later. However, the big question midlifers might need to answer is: when should IHT planning become one of my main financial priorities? And what are some practical steps I can take while my chief goal is to accumulate wealth rather than preserve it?

Marriage made in haven

You may think that the more you’re worth on death, the more tax your heirs will pay. But that’s not necessarily true. Your marital status and whether you’re a parent can dictate how much you can pass on tax free.

Like some other areas of the UK tax system, there are benefits to being married. That’s because transfers between spouses and civil partners are exempt from the tax, and there’s no cap.

Beyond this, there are certain tax-free allowances available on death. Let’s break down who they apply to and how they work.

The first £325,0000 (the nil rate band) of your net estate (everything your own minus everything you owe) is free from tax.

In addition, the first £175,000 of your home (the residence nil rate band) might also be tax free. You only get this allowance if the property is left to direct descendants (children, grandchildren) – so if you’re not a parent, you won’t get it. Furthermore, the residence nil rate band is reduced by £1 for every £2 your estate exceeds £2 million, meaning it’s wiped out once assets hit £2.35 million for individuals and £2.7 million for married couples and civil partnerships.

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The latter point helps illustrate another IHT advantage of being married. The survivor can inherit any unused nil rate band and residence nil rate band from the deceased. Add the maximum amounts together and you get £500,000, times that by two and the amount that can potentially be passed to your offspring, tax free, is £1 million. Note, this assumes that the surviving spouse receives everything. Anything passed to children on the first death will eat into the nil rate band that can be transferred.

The £270,000 IHT gap

Societal relationship shifts have increased romantic couples’ exposure to IHT. Figures from the Office for National Statistics (ONS) from last year showed that the number of people getting married fell below 50%, while research from Russell Cooke found that seven in 10 were wed in the 1970s, but just four in 10 are today.

It goes without saying that couples shouldn’t tie the knot for tax reasons alone - you may ease one financial problem but create a swarm of others. That said, the upcoming change to pension rules has prompted more people to wed their long-term partners, according to reports, and the stats below help to explain why.

Here, we look at the tax implications for two estate values (£600,000 and £1 million) across three examples: inheriting from a spouse or civil partner, a single (not previously married) parent, and a non-married partner. I’ve included the situation on death both before and after 6 April 2027, when pensions enter the IHT frame, and assumed pension values.

*** this assumes house worth £220,000, pension worth £330,000 (enough for a moderate retirement according to Pensions UK) and cash of £50,000.

**** this assumes house worth £450,000, pension worth £450,000 and cash of £100,000.

So, let’s explain the differences.

As mentioned above, spouses and civil partners can not only inherit everything tax free, but any unused nil rate band and residence nil rate band can be transferred, too.

But the system isn’t so generous to other groups.

If you inherit from a single parent (importantly one who wasn’t previously married then widowed), the nil rate band can be used, plus the residence nil rate band, taking the potential tax-free total to £500,000. IHT is payable on anything above, creating bills of £40,000 on a £600,000 estate, and £200,00o on a £1 million inheritance.

When receiving assets from the unmarried partner, the system is even more punishing.

That’s because while the nil rate band can be harnessed, the residence nil rate is out of play unless it’s left to direct descendants such as children, grandchildren, great grandchildren, stepchildren, foster children, etc. Unmarried partners don’t qualify.

So, if you’re in a relationship, own a home worth £270,000 (mortgage free), and have £330,000 across pensions and savings, your partner would face IHT of £110,000. And that’s excluding any other things like individuals savings accounts (ISA), money in bank accounts, chattels and any other assets.

Simply put, if you’re not married and don’t have children, and if the net value of your estate is worth more than £325,000, your beneficiaries will pay tax. This will shunt lots of unmarried couples into the net. Those living in areas where properties are expensive could see IHT applied to their entire pension savings.

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A further challenge is that the tax-free thresholds will remain static until at least 2030-31, so if house prices and stock markets tick up during this period, which we would expect them to, more couples will enter the net, and those already in IHT territory could face a higher HMRC bill. The nil rate band has already been frozen since 2009.

These examples prompt a very important question: if you’ve got an IHT liability and are years from retirement, do you need to act now?

Even though the answer is complicated, the reality is that for many people, doing things that will increase their IHT liability is absolutely the best approach. Keeping your wealth below your personal IHT threshold may not create financial freedom.

Even if estate planning sits below other goals in your personal pecking order, it’s still absolutely vital to understand how your estate might be taxed on death, especially with the upcoming rule change to pensions. That doesn’t mean you need to make drastic decisions and overhaul your finances. By completing some simple tasks and some well-thought-out planning, you could save your nearest and dearest some tax and make things easier for them to manage, should the worst happen.

1) Create or update a will

This is typically the first port of call. Whether you have a potential IHT liability or not, it’s vital that you have a valid will in place as it enables your assets to be distributed in line with your preferences when you die. It also allows you to name the people (called executors) who you entrust to carry out these wishes.

As things can change over time, it’s important to revisit your will periodically to make sure it’s still up to date. In some cases, it might be best to make a new one.

When writing a will, getting legal advice can be a wise move. The reason is that if it turns out to be invalid, your estate could be bound by the laws of intestacy, which are extremely rigid and may cause friction among your heirs and also result in an unwanted tax bill.

2) Check any insurance policies are in trust

The importance of placing life insurance policies in trust cannot be overstated. The reason is that in the absence of this, the money will form part of your estate and could be taxed, leaving insufficient funds to clear a mortgage and/or, if you were the main breadwinner, support surviving member to meet outgoings.

This is a vital task for married couples, as well single people and cohabitors. Any debt you have can offset your IHT liability, so it’s vital to make sure any insurance to help the surviving spouse or partner clear these borrowings is outside your estate.

Parents, for example, can set up a survivor’s trust, which means the money passes to the surviving partner provided they’re still alive a month after the first spouse dies. If both parents were to die within this period, the proceeds pass straight to the children via the trust, relieving them of a potential IHT bill on those funds.

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3) Get your pension beneficiaries up to date

Completing an expression of wish form allows you to tell your pension provider who you would like to benefit from any unspent funds in the event of your death.

The scheme’s trustees are not legally bound by your preferences – ultimately, they get to decide – but normally they carry out your wishes. If there is no expression of wish in place, the provider will have to do some digging to discover the appropriate party or parties to benefit.

This could mean the pension ends up in unintended hands – for example, your kids instead of spouse – and potentially trigger IHT. With the pension rules set to change from next April, now is a good time to review who you would like to inherit your pension and understand the potential tax implications.

4) Gift where it makes sense

Lastly, it would be remiss to totally rule out making gifts to tackle IHT while in midlife. Some affluent folk may already have cash or assets deemed surplus to requirements.

Moreover, there are often stronger reasons to give your offspring a leg-up than purely saving them a future tax bill. Parents who help fund a child’s house purchase are rarely thinking of IHT first, even though gifting when you’re younger offers better odds of surviving the seven-year rule. This applies to most one-off gifts above your annual tax-free gifting allowance - although parents can also each give £5,000 in respect of weddings.

The approach here is to give away amounts that are sensible and affordable, balancing the financial needs of younger generations while being mindful of your own future, particularly if you still need to do more to achieve financial independence.