Solidus Spring 2026 Bulletin

Welcome to the fourth issue of our Estate Planning Bulletin

As a reminder, these bulletins are designed to provide an insight into topical estate and inheritance tax planning issues.

In this bulletin, we cover the following areas:

• Inheritance tax and pension funds

• Using a discretionary Will Trust to secure the residence nil rate band

• More changes to business and agricultural relief

• Claiming the normal expenditure from income exemption on gifts made from a joint bank account

  
  

Inheritance tax and pension funds

From 6 April 2027, unused pension funds on an individual’s death will be treated as part of the deceased’s estate for inheritance tax purposes. A consultation in 2025 concluded that it the responsibility for reporting and paying any inheritance tax due on pension assets should move from the pension scheme administrators (PSAs) to the deceased’s personal representatives. At that time, the government also confirmed that death-in-service benefits from registered pension schemes would remain out of scope of inheritance tax.

Some further important changes were announced by the government in the 2025 Budget:

• Personal representatives will be able to instruct PSAs to withhold up to 50% of the taxable pension death benefits for a period of up to 15 months and in some circumstances, compel them, to pay the inheritance tax due on those death benefits. The withholding of up to 50% of the pension assets is to ensure that sufficient money is available to meet the inheritance tax liability on the pension assets.

  
  

• This does not apply to any exempt pension death benefits (such as those passing to a surviving spouse or civil partner or those that may be covered by the deceased’s nil rate band).

  
  

• Personal representatives will be able to obtain an HMRC clearance confirming that they will not be liable to pay any inheritance tax on later discovered pensions – further pension benefits that are discovered after the personal representatives have completed the administration of the estate.

  
  

• The pension scheme beneficiary(ies) will remain liable for any inheritance tax but will be able to instruct the PSAs of those later discovered pensions to pay the liability to HMRC from the death benefits before the balance is paid to them.

Despite these relaxations, the introduction of inheritance tax on unused pension funds for deaths after 5 April 2027 will significantly add to the administration of an estate for personal representatives. In light of this, many ‘lay’ people nominated as personal representatives may decide not to accept their position.

Inheritance tax is due six months following the end of the month of death and any delays in establishing and paying inheritance tax liabilities could incur late payment interest charges of 4% over The Bank of England base rate. The House of Lords Economic Sub-Committee has, in a recent report, recommended that the inheritance tax liability on pension schemes should only incur interest if the tax liability has not been paid after 12 months.

Planning

Although these measures apply where death occurs after 5 April 2027, it is worth considering action now in contemplation of them coming into effect.

Pension scheme members should review any expressions of wishes or nominations to the pension scheme administrators in light of the changes to the taxation of pensions on death.

As ever, much will depend on the circumstances, but an expression of wishes in favour of the member’s spouse may avoid inheritance tax on the member’s death but then bring any remaining death benefits within the estate of the surviving spouse on his or her subsequent death.

A binding nomination may be more appropriate after 6 April 2027, although some schemes’ rules may need to change to accommodate binding nominations.

Drawing benefits from a pension scheme

As currently, assets held in pension funds are free of inheritance tax, previous accepted planning was to decumulate other assets in the estate before pension assets to minimise inheritance tax liabilities on the estate. Moving forward, it might be more efficient to draw down pension assets first and to consider gifting any ‘surplus’ assets in the estate. Such gifts will then fall out of the inheritance tax net if the donor survives the gift(s) by at least seven years.

Those who have pension funds valued in excess of the amount required to cover their needs and who have not drawn their tax-free cash, could consider taking this before 6 April 2027 if not required, gifting it to, say, family members or a Trust. On the donor’s survival for 7 years, the gift will be free of inheritance tax. Use of trusts, such as discounted gift trusts and/or loan trusts, could allow an income stream and/or access to capital to be retained by the settlor.

If tax-free cash has not been taken and remains in the pension when death occurs after 6 April 2027, that cash could be subject to both inheritance tax (up to 40%) and income tax when drawn down by the beneficiary (at the beneficiary’s marginal rates of income tax).

The aggregate marginal tax rate on these funds could be up to 76% (or even more in certain cases). If the value of the pension death benefits causes the deceased’s estate to exceed £2 million, a reduction in the entitlement to the residence nil rate band could further increase inheritance tax liabilities by up to £140,000.

Those with large pension funds may consider drawing down additional amounts as income from their pension(s) and then gifting any surplus income over their expenditure using the inheritance tax normal expenditure from income (NEI) exemption. Benefits drawn down from the pension fund are taxed as income, so this strategy may work best where such income is taxed at a lower rate than the rate of inheritance tax. There are conditions that need to be met to qualify for the normal expenditure from income exemption.

Business owners

Business owners who have attained the age of 55 could consider reducing their remuneration from the business and replacing it by drawing down from their pension fund (which is not subject to National Insurance contributions).

While the increased profits retained by the company will be subject to corporation tax, this is charged at a lower rate (between 19% and 25% depending on the level of the company’s profits) than the inheritance tax suffered on the pension fund.

On the business owner’s subsequent death, business relief may provide 100% relief from inheritance tax on up to £2.5 million of the value of the company (or, up to £5 million for married couples on the second death), with any excess receiving 50% relief, compared to the pension funds being liable to inheritance tax at up to 40% for deaths after 5 April 2027.

Should additional income be required in the future, remuneration from the company can always be increased.

Providing for the inheritance tax liability

Life assurance policies written in trust (including relevant life policies for business owners, death-in-service benefits and excepted group life schemes) can be used to pass funds to, say, family members, without being subject to probate or inheritance tax.

The recipient family members can then lend funds to the deceased’s personal representatives to meet inheritance tax liabilities on the free estate. These payments can also be used to ‘top up’ the amounts received by the beneficiaries to compensate for increased inheritance tax liabilities on any pension plans.

Using a discretionary Will Trust to secure the residence nil rate band

The continued freezing of the £2 million taper limit for the residence nil rate band and the fact that pension death benefits on a person’s death will, from 6 April 2027, count towards this £2 million limit means that those with estates with a value near to £2 million will need to be more careful with the planning they undertake with their Wills.

Where the deceased is entitled to his or her own residence nil rate band and a full transferable residence nil rate band from the estate of a previously deceased spouse, the deceased’s estate will, prima facie, be entitled to a total residence nil rate band of, currently, up to £350,000, if an interest in a private residence passes to a lineal descendant(s) such as a child or grandchild.

If the value of the deceased’s assets on death exceeds £2 million, any entitlement to the residence nil rate band is reduced by £1 for every £2 of the excess.

Assuming there was no abatement of the residence nil rate band under the £2 million test on the first death, this means that, if the survivor’s assets on death exceed £2.7 million in value, all entitlement to the residence and transferable residence nil rate band will be lost. This can cost the estate an additional £140,000 in inheritance tax.

In particular, where the combined value of both the husband’s and wife’s assets is likely to cause a reduction in the residence nil rate band (typically where the combined value is between £2 million and £3 million), it can make sense for them to consider planning to reduce the value of the survivor’s assets on the second death without, necessarily, reducing the survivor’s financial security.

The couple could consider changing their Wills so that, on the first death, up to £325,000 of the deceased’s assets (after taking account of chargeable lifetime transfers and potentially exempt transfers in the seven years before death) pass into a nil rate band discretionary Will Trust under which the surviving spouse is a potential beneficiary. The rest of the deceased’s estate would pass to the surviving spouse. The implications of this action would be:

• The survivor’s estate will be reduced by up to £325,000 (plus any future investment growth) which, assuming no increase in the residence nil rate band, could reinstate up to £162,500 of the survivor’s residence nil rate band, saving up to £65,000 in inheritance tax.

  
  

• Growth on the £325,000 held in the trust would be outside the survivor’s taxable estate, although there could be ongoing 10-year periodic charges and exit charges on the trust, albeit at a low rate of inheritance tax. It is also worth remembering that a trust has its own nil rate band.

  
  

• As a potential beneficiary of the trust, the survivor could, if cash were needed, benefit by the trustees making appointments to him or her. If payments are made by interest-free loans repayable on demand, these would, if spent, build up debts on the survivor’s taxable estate so further reducing inheritance tax liabilities on the survivor’s subsequent death.

Each of the husband and wife would need to own assets of at least £325,000, in their own name, in order to satisfy the legacy.

Where there are insufficient liquid assets to pass to the trust on the first death, the family home could be placed into ownership as tenants-in-common and, on the first death, a part of the deceased’s share equal to the nil rate band at that time could be transferred by the deceased’s Will to the trust, possibly by way of a debt on the property.

If the home were used in this way, its value, for inheritance tax purposes, would reduce by between 5% and 10% after the first death.

More changes to business relief and agricultural relief

Since coming into power in July 2024, the government has made several important announcements on business and agricultural relief.

AIM shares

In the October 2024 Budget, it was announced that, from 6 April 2026, shares ‘not listed’ on the markets of a recognised stock exchange, such as AIM shares, will only receive business relief at 50% on lifetime gifting by, or on the death of, the shareholder.

Such shares will not count towards the new 100% allowance described below.

The reduction in business relief on AIM shares will significantly reduce one of the few inheritance tax planning opportunities available to attorneys where an individual has lost mental capacity or can no longer manage their own financial affairs.

However, in the right circumstances, it might be possible to invest in a business relief scheme and qualify for 100% relief once shares have been owned for two years.

New 100% business and agricultural relief allowance

It was also proposed in the October 2024 Budget that, with effect from 6 April 2026, 100% business relief (BR) and/ or agricultural relief (AR) would be limited to the first £1 million of qualifying assets with any excess qualifying for 50% relief.

After an initial consultation period, a briefing document was issued in July 2025. This provided little change to original proposals.

The government has since announced two important relaxations to their original proposals:

(a) Transferable unused 100% allowance

Firstly, the November 2025 Budget announced that, on a person’s death, any of their unused £1 million 100% BR and/or AR allowance can be transferred to a surviving spouse or civil partner. This transferable allowance is expected to work in a similar way to the transferable nil rate band. We await the final legislation for full details.

(b) Increase in the 100% allowance

Secondly, in a surprise announcement made on 23 December 2025, the government stated that the 100% allowance would increase from £1 million to £2.5 million of qualifying business and/or agricultural assets.

This means that if a married individual died not using any of his or her 100% allowance, his or her surviving spouse would be entitled to a 100% allowance of up to £5 million on his or her subsequent death.

It should be borne in mind that, as well as family trading companies and agricultural property, these new rules extend to investments in unquoted trading companies offered by venture capital firms (“business relief schemes”).

What these changes mean in terms of planning for business owners

Whilst the text below concentrates on qualifying business assets, similar principles apply to qualifying agricultural assets.

The effect of these changes on those who own “family” business assets that they wish to pass on to the next generation will depend on:

• The value of the business assets;

• Whether they are married or have a civil partner;

• Whether they wish to pass the assets to other family members; and

• Whether they have already made gifts of business and/or agricultural assets, possibly as a result of the October 2024 Budget announcement.

The following is a general overview on the options available and assumes that all business assets qualify for 100% business relief (i.e. there are no restrictions for investment assets).

(i) Use of Business Trusts

100% BR qualifying assets can be directed into Trust on death, rather than to the surviving spouse or children absolutely. This ensures that the assets are held outside of their estate and not subject to IHT on their death if the business has been sold, increases in value beyond the £2.5m threshold or ceases to qualify for BR .

(ii) Business assets worth up to the amount of the 100% allowance

Where business assets are worth less than £5 million and the business owner is married or has a civil partner, the transferable allowance means that, with sensible planning, no inheritance tax needs be paid on those assets on death after 5 April 2026.

So, for example, if qualifying business assets worth up to £5 million were split between husband and wife on a 50/50 basis and each left their interest to, say, their children on death, no inheritance tax liability would arise.

Alternatively, a business owner dying as the survivor of a married couple, where the first to die had not used any of their 100% allowance, would have a £5 million 100% allowance from 6 April 2026. So, a married couple could each leave their estate to the survivor on the first death enabling the survivor to use up to the full £5 million 100% allowance on their subsequent death.

An additional benefit of leaving assets on death is that no capital gains tax liability then arises and asset values are rebased for Capital Gains Tax (CGT).

(iii) Business assets worth more than the amount of the 100% allowance

Inheritance tax can still apply to qualifying business assets worth more than the available £2.5 million 100% allowance at an effective rate of 20% on the excess over the available 100% allowance.

While business assets may currently be worth less than the 100% allowance, some consideration may be needed to the future potential growth of the assets as they may grow to be worth more than the available 100% allowance.

Owners who feel that inheritance tax might apply to their business assets could consider making lifetime gifts of some or all of those assets. On surviving the gift by seven years, it would then fall outside their estate for inheritance tax purposes.

Of course, CGT on such gifts would need to be considered but CGT holdover relief could normally be claimed.

Where the gift is outright, it will be a potentially exempt transfer (PET).

If made to a discretionary or interest in possession trust, it would be a chargeable lifetime transfer but no immediate inheritance tax liability would arise if the gift was made before 6 April 2026 or, if made after that, it does not exceed the total of the donor’s available 100% allowance and nil rate band (see below).

A “gift inter-vivos” life assurance policy in trust for the benefit of the donees of the gift can cover any potential inheritance tax liabilities.

(iv) Those who have made recent gifts of business assets

Following the October 2024 Budget, some business owners took action to transfer some or all of their business assets to their children, either directly or via discretionary trusts.

Unlimited transfers can be made before 6 April 2026 without incurring an inheritance tax liability, provided the donor survives the gift by seven years.

Relevant property trusts that were created before 30 October 2024 to hold business and/or agricultural assets will have their own 100% £2.5 million allowance for business relief and/or agricultural relief. This allowance will apply when calculating periodic charges on each of the trust’s 10-year anniversaries.

Trusts created on or after 30 October 2024 will be entitled to a 100% relief allowance at the first 10-year anniversary which will be the lower of the value of the property transferred to the trust and £2.5 million.

For trusts created on or after 30 October 2024, the total 100% allowance is shared between them on a chronological basis.

Currently, inheritance tax due on business and agricultural assets has to be paid within six months following the end of the month of death. For business and/or agricultural property, the tax can be paid in interest-free instalments over 10 years. However, at the end of January, the House of Lords Economic Affairs Sub-Committee proposed that the due date for inheritance tax on business and/or agricultural property should be extended from 6 months to 12 months as a “much-needed step to address the liquidity problems many of these estates will suffer”.

Even if the instalment option is chosen, the need to pay inheritance tax can put an immense strain on a business and could cause significant disruption to its day-to-day business activities.

Life assurance policies effected in trust can ease the problem.

Claiming the normal expenditure from income exemption on gifts made from a joint bank account

As inheritance tax liabilities increase and impact more people, the normal expenditure from income (NEI) exemption has become much more important as a means of inheritance tax planning.

Gifts that satisfy the requirements for the NEI exemption are treated as exempt from inheritance tax when made, there is no need for the donor to survive seven years for the gift to fall outside the donor’s taxable estate for inheritance tax.

This is, of course, subject to HMRC agreeing the availability of the exemption when a return is made on the donor’s death.

To qualify for the NEI exemption, gifts must be made:

• out of income;

• on a regular basis; and

• without reducing the donor’s standard of living

An efficient way of using the NEI exemption is to pay premiums into a life policy in trust so that the sum assured is then available to meet any inheritance tax liability on death.

In general, gifts made that a person considers to be within their NEI exemption do not need to be disclosed to HMRC when they are made.

However, this is subject to such gifts not causing an individual to exceed his or her nil rate band in a seven-year period.

Should such cumulative gifts over a seven-year period exceed the nil rate band, HMRC requires a return so that they can check whether the normal expenditure from income exemption does actually apply.

HMRC practice on this is set out in IHTM06106.

Lifetime gifts will, of course, need to be disclosed on an individual’s death.

In order to make life easier for personal representatives to claim the NEI exemption on the donor’s death, it can make sense for the donor(s) to complete Form IHT403 when making the gifts.

Form IHT403 sets out details of lifetime gifts made in the seven years before a donor’s death.

It is also used to claim the NEI exemption on gifts made in the seven years before the donor’s death.

For the purposes of the NEI exemption, section 20 of Form IHT403 requires the personal representatives to itemise the donor’s income and expenditure and give details on the amounts and regularity of gifts.

The personal representatives might find it difficult to obtain all of this information without the donor’s help and that is why the donor should complete the form (or otherwise keep accurate records) while he or she is alive.

Each donor should complete a separate form detailing the gifts attributable to him or her, each of their incomes and each of their shares of expenditure.

Gifts made from a joint bank account

Another important point concerns the identity of who is actually making the gift. Particular problems can arise when gifts are made out of a joint bank account. HMRC’s position on joint accounts is set out in IHTM15042 and IHTM15043.

HMRC will, in most cases, adopt a pragmatic approach and treat gifts as made on a 50/50 basis unless there is evidence to the contrary. But the position can change when a claim is being made that gifts fall within the NEI exemption.

Because inheritance tax is a tax on individuals, HMRC reserves the right to test normal expenditure from income against payments in and out of that account for the spouse in question. Indeed, the NEI part (Section 20) of Form IHT403 asks for details of the income and expenditure of the deceased person in the seven years before his or her death.

For example, assume that the income passing into a joint account is £150,000 p.a. from the husband and £59,000 p.a. from the wife with expenditure of £100,000 p.a. shared equally between them. They pay a premium of £30,000 p.a. to a joint life last survivor whole of life policy in trust. Each wish to claim the NEI exemption against their £15,000 p.a. share of the gifts (the policy premiums) being made each year.

Here, it will not necessarily follow that each can claim that his or her gift of £15,000 p.a. is covered by the NEI exemption. Based on the above figures, whilst the husband has surplus annual income of £100,000, the wife only has surplus annual income of £9,000. On the wife’s death, it is therefore likely that HMRC will decline to give the NEI exemption on the wife’s full £15,000 p.a. share of the gifts and instead treat up to £6,000 each year (after deduction of any other available exemptions) as an amount that falls within her available nil rate band.

In such a case, it might be easier to draw up a memorandum specifying the proportion of gifts being paid by each of the two parties, so that if, say, the husband dies first, his share of the gifts can be tested against his higher share of the net income. So, in the above example, the husband could specify that he pays £21,000 p.a. of the premium out of the joint account and the wife pays £9,000 p.a. The NEI exemption should then be available against both gifts.

Alternatively, it might be worth considering whether the spouse with the dominant share of the income should alone make the gift.

To avoid confusion, it may then be easier to pay the premiums from an account in that person’s sole name. So, in the above example, if the husband alone made the gift of £30,000 p.a., it would, hopefully, fully qualify for the NEI exemption.

If this approach were taken where a couple are setting up a joint life last survivor policy under a discretionary trust, it may be appropriate for the husband to be the sole settlor so that he is treated as paying all the premiums and making all the gifts for the NEI exemption purposes.

However, thought would need to be given to what happens if he dies first and premium payments need to continue. These would then presumably need to be paid by his wife, as the surviving spouse, so she would, at that, point, need to have sufficient income to justify the NEI exemption on all continuing premium payments.

Whilst this issue needs to be addressed where a couple are paying premiums 50/50, it becomes more of an acute issue where the one who is paying a significant proportion of the premiums dies first.

If the husband dies first and, at that time, his wife inherits her husband’s pension death benefits, ongoing gifts could be justified because of her increased pension entitlement or by her making drawdown payments from the inherited death benefits.

The settlor’s spouse and widow or widower (in this case, the wife) would also, of course, need to be excluded under the trust to avoid a gift with reservation problem.

Each case needs to be considered on its own merits and circumstances but it is important to remember that Form IHT403 requests details of the income and expenditure of the deceased and so, in cases where large gifts have been made and a claim is made for the NEI exemption, HMRC is likely to examine this information.

More and more people are now effecting life assurance policies subject to a discretionary trust, so those who intend to make premium payments out of joint bank account and claim the NEI exemption on those premium payments need to consider the above points very carefully.

This document is based on Solidus IEP Ltd and Trustee Support Services Limited’s understanding of applicable legislation and current HMRC practice as at 1 February 2026. Professional advice should be taken before any planning is implemented.

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