Wealthy Britons Embrace Creative Tactics to Beat Inheritance Tax

Businessman Steve Perez is paying a high price to ensure his company survives once he’s no longer around.

The 68-year-old owner of a drinks and hotel chain in northern England is readying to hand over the princely sum of £100,000($130,000) a year for life insurance that will cover the estimated £10 million inheritance tax his heirs will need to pay on the business if he dies within the next decade.

The payments, which he’ll finance by taking dividends from his company, will cover a tax bill that he says his firm would otherwise struggle to pay. And he’s not alone.

“It’s about protecting the business going forward and to some extent my own legacy of what I’ve built up,” he said.

Across the UK, entrepreneurs and more affluent Britons are grappling with changes to inheritance tax that are upending traditional strategies for transferring family wealth. The ability to pass on pensions and businesses mostly tax free will soon be gone,leaving the prospect of tax at as much as 40% and the unappetizing possibility of forced asset sales or the breakup of a business to cover the potential costs.

“Suddenly [people are] looking at a large inheritance tax bill when they weren’t planning to look at an inheritance tax bill at all,” said Clare Munro, a senior tax adviser at Weatherbys Private Bank in London.

“People are sort of thinking, ‘Well, actually, I may not totally trust my relatives but I dislike the government rather more.”

Major changes by the Labour government include new levies on businesses, pensions and farmlands and the freezing of thresholds at which inheritance tax kicks in as part of plans to strengthen the country’s finances. From April next year farms and businesses will be taxed at 20% above £1 million. A year later, pensions will also be included in a person’s estate and taxed accordingly.

The government is also keeping the rate on which no inheritance tax is due at £325,000 until 2030. After that amount, the levy is 40%. That means that inflation and rising property values are likely to bring more estates into the tax net.

Right now, only about 4% of the UK population is liable for inheritance tax, which in 2024 raised about £7.5 billion. But there’s few more emotive topics in personal finance — or more disliked taxes. Pension changes especially have irked older Britons who say they’ve saved for decades only to see their plans for passing on their assets overturned. The government and those in favor of the reforms say there’s no good reason why pensions should even have been used as a wealth-planning strategy in the first place.

Small business owners are confronted with a range of challenges, ranging from the shareholder structures when it comes to inheritance and, in some cases, how to value the company to prepare for the day when the tax becomes due.

The uncertainty is proving a boon for financial advisers and wealth managers. They’re reporting a surge in interest from those looking to understand the changes and explore options. But even they say it’s going to hurt.

“I’m sitting there, hoping that the government doesn’t go through with it. It’s put me in a really difficult position.”

“Right now, only about 4% of the UK population is liable for inheritance tax, which in 2024 raised about £7.5 billion.”

“We’ve been incredibly busy,” said Helen Clarke, a partner at full-service law firm Irwin Mitchell. She said she’s seen an unprecedented amount of clients calling with assets over £2 million.

The policy changes are expected to raise £2.3 billion per year by 2029, according to government estimates, though it’s unclear by how much that amount could be reduced as people examine strategies.

Those range from simply drawing more on pensions, which allow 25% to be taken tax-free as a one-off , to establishing a trust to pass on assets to children, to gifting property and even, as with hotel owner Perez, to take on outsized life insurance policies to help cover the cost of the tax.

Pensions are at the heart of the changes. One popular strategy advisors are already seeing is people taking more from them since they will soon form part of a person’s estate.

“The best inheritance tax planning in the world is enjoying what you’ve accumulated,” said Munro, “Spend it, gift it, have a ball.” People taking more money out of their pension pots are either gifting it to family members, or spending it all now, she said. In the UK, a gift is exempt provided it occurs at least seven years before the person dies.

Jim Everard, a 64-year old Somerset-based retiree, is taking the advice on spending to heart. He recently doubled the amount of money he takes from his pension and is splashing out on holidays and a new car.

The former IT manager, who retired six years ago, has taken long-haul trips in the past year to ski in Japan and visit family in Australia. He has three more similar vacations booked and plans to spend 15-to-20 weeks of the year abroad. He’s also eyeing up a Polestar Volvo electric car to replace his BMW.

“As there’s no tax benefit, I just spend it for a good time, basically mainly foreign holidays,” he said.

Besides exotic travels, some well-heeled Britons are contemplating giving more of their wealth — and earlier — to family, compared to when they hoped to transfer it when they passed, Munro said.

“People are sort of thinking, ‘Well, actually, I may not totally trust my relatives but I dislike the government rather more.”

Lak Sidhu, a 59-year old finance director in Maidenhead, Berkshire,is well on that path already.

“Pensions are at the heart of the changes.”

He plans to give more away to his three children, all in their twenties, and has already paid off their student debt. He’s started putting cash into their tax-efficient stock accounts and is also planning to help them onto the property ladder.

“This budget has made us think a lot harder about what we plan to do with our pension,” he said. “I’ll probably start handing down my wealth to my children sooner, making sure there’s enough in the kitty for the wife and I.”

In the case of business owners, there are particular problems for those with younger heirs. Hotel owner Perez is considering gifting some of his assets to his 25-year-old son, but believes he’s too young to take over the firm. “Perhaps in ten years’ time or so, he might hopefully be in a position where he could run the business.”

Individuals are also shifting their assets from pension pots and businesses to trusts and some mid-size UK company stocks exempt from tax, said Liviu Ratoi, a financial adviser with wealth firm Flying Colours.

Still, the changes and general uncertainty underscore the already challenging strategy of inheritance planning given the difficulties of predicting life expectancy, end-of-life healthcare costs and changes to family dynamics, he said.

Some are instead taking more of a wait-and-see approach in the hope that a future government could reverse some of the new policies, Ratoi said.

“The best inheritance tax planning in the world is enjoying what you’ve accumulated, Spend it, gift it, have a ball.”

“Individuals are also shifting their assets from pension pots and businesses to trusts and some mid-size UK company stocks exempt from tax”

That’s the case for Michael Brundle, a Rainham-based owner of a £80 million delivery service business that goes back five generations. The 51-year-old reckons he’s looking at a £16 million tax bill from his business on his death, something that would effectively bankrupt the company — or force a breakup.

He’s considering selling his firm, leaving the country, putting assets in a trust or gifting it to his kids. But his children are still teenagers and he’s not wild about the other options either.

“The last thing I want to do is leave some enormous liability for my wife to work out,” he said, “But I’m sitting there, hoping that the government doesn’t go through with it. It’s put me in a really difficult position.”