Inheritance Tax changes on Pensions and Trusts: What business owners need to know

For many years, pensions and trusts have been powerful tools for business owners looking to protect their wealth and pass assets to the next generation efficiently. For business owners who have relied on pensions as a safe way to pass wealth to the next generation, this represents a fundamental shift.

In this article, we explore what’s changing, why it matters, and the key steps business owners should take now.

The landscape is shifting

Pensions have long been used by business owners as a tax-efficient inheritance vehicle. Now, the government is effectively dismantling this strategy. In fact, the anticipated revenue from these pension IHT changes is significantly more than the expected extra income from reforms to Business Property Relief (BPR) and Agricultural Property Relief (APR) combined.

Government announcements in October 2024 mean the rules are significantly changing. Draft legislation and consultation responses published from late 2024 through to July 2025 signal that:

• Unused pension funds on death will become part of the estate for Inheritance Tax (IHT) purposes from April 2027
• However, if you leave your pension to a charity, it won’t be subject to Inheritance Tax. This means the full amount goes to the charity, and it can help lower the amount of Inheritance Tax payable on your estate.
• The government has frozen the Inheritance Tax threshold (also called the ‘nil-rate band’) at £325,000 until 2030. Under previous rules, the threshold was frozen till 2028.
• Trusts will face significant restrictions and limits on how and when IHT reliefs such as Business Property Relief (BPR) and Agricultural Property Relief (APR) can be applied.

These changes represent a significant shift in succession planning. For many business owners, it could mean that wealth previously thought to be outside of IHT may now attract a 40% tax charge.

Business owners often rely on a combination of pensions, trusts, and reliefs like BPR to manage succession and safeguard family wealth. The upcoming reforms raise important questions:

• Pensions as an IHT shelter: Until now, pensions have typically been one of the most tax-efficient assets to pass down. From 2027, this advantage will largely be removed.
• The double tax trap: Inherited pensions may now attract both IHT (40%) and income tax, particularly if the deceased was aged over 75. This means that the much-discussed “double whammy” of IHT and income tax on the same pension assets seems certain to become law. This may open up planning opportunities during lifetime.
• Trust structures under review: New rules limit how multiple reliefs can be applied to assets placed into trust, potentially reducing flexibility in estate planning.
• Liquidity challenges: Business owners holding illiquid assets (e.g., commercial property, AIM shares) in pensions may struggle to source cash quickly to settle IHT, potentially forcing untimely asset or share sales.
• Administrative complexity: Personal representatives (PRs) must collate pension valuations, align them with estate calculations, and allocate IHT liability correctly among beneficiaries. The scope for practical problems seems clear, particularly as the IHT will be due six months after the month of death.

What steps should you consider?

While every situation is unique, here are some practical areas to review with your advisers:

• Understand your IHT exposure
  • Model your estate position under the new rules, particularly pensions, trusts, and any assets currently benefiting from BPR or APR.
  • A “what if” calculation can be an eye-opener, showing the potential IHT liability from April 2027 onwards.
• Review pension beneficiaries and consider alternative arrangements
• Review existing trusts and consider trust planning
  • Ensure current trust structures are still fit for purpose under the revised rules. New trust structures may require careful consideration.
  • Assess whether transfers in or out of trusts should be completed before April 2026
• Explore gifting options
  • Consider whether there are opportunities for early gifting before the changes come in. Now may be the ideal time to act, even ahead of the upcoming Budget day
• Review business succession planning
  • Check whether your assets still qualify for BPR under the draft legislation.
  • Explore whether company reorganisation or restructuring could help preserve reliefs. Consider the use of Family Investment Companies (FICs) in structure and tax planning
• Align tax and financial planning. Engage a tax adviser and an FCA-regulated planner where needed
  • Tax and succession planning should go hand in hand with financial planning. We work closely with FCA-authorised financial advisers where pensions and investments are concerned, to ensure clients’ plans are robust and compliant.

In conclusion…

With consultations closed and draft legislation published, the direction is clear, and the impact for business owners could be profound. Acting early gives you more options, and it has never been more important to take professional advice about your estate planning. As you navigate these changes, professional advice tailored to your circumstances is essential. The landscape has shifted, but with proper planning, effective strategies can still be implemented. The message is clear: don’t wait until 2027, start planning now.

Next steps

We specialise in helping business owners and families navigate IHT changes, succession planning, and tax-efficient structuring. We also work alongside trusted FCA-authorised advisers to deliver joined-up solutions where this is required.

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To discuss how these changes could affect your estate and business succession, get in touch with us.

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Please note: This article is for general information purposes only and was correct as at the time of writing (26/08/25) and does not constitute financial advice. Tax rules and legislation are subject to change, and their application depends on your individual circumstances. We recommend seeking advice from a suitably qualified tax adviser, and where relevant, an FCA-authorised financial planner. Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.