Using the tax-free lump sum to reduce future pension exposure to IHT

Our Business Relief estate planning scenarios are based on situations advisers often encounter, making them a great starting point for discussions with your own clients.

From April 2026, the first £2.5 million invested in unquoted (privately owned) shares that qualify for Business Relief will attract a 100% rate of relief (an effective IHT rate of 0%). Anything above £2.5m will attract a 50% rate of relief (an effective rate of 20% IHT). For shares to qualify for Business Relief, they must have been owned by the deceased for at least two years before they died. For clients with significant pension wealth, their estate will face a potential 40% IHT bill plus a potential future income tax bill for beneficiaries when they draw from the pension. In other words, what was once a reliable route for passing wealth down tax-efficiently has effectively been closed off.

Meet Matthew

In this client planning example, Matthew (aged 70) needs advice on which assets to spend first. Along with other assets worth a significant amount, he also has a £1 million pension pot and has not taken out his tax-free lump sum. Like many advised clients, his plan had been to preserve his pension and use it as a legacy for his children. But under the new rules from 2027, leaving his pension untouched would expose the full £1 million to IHT, further increasing the already sizeable IHT liability on his estate.

Using Business Relief for IHT exemption

Bearing in mind the proposed changes to pensions and IHT, Matthew’s adviser suggests he consider taking his 25% tax-free lump sum of £250,000 and investing it in a Business Relief-qualifying investment service. Provided Matthew holds the shares for at least two years, and for a minimum of two years in the last five years, and still owns them at death, this investment should be free from IHT at death. By combining his tax-free pension entitlement with Business Relief, Matthew could protect a significant part of his estate from the new IHT charge.

Investor’s capital is at risk. Target returns are not guaranteed. This client planning scenario does not take into account investment growth or charges for the investment. It is based on tax rules and personal allowances at January 2026, which could be subject to change and depend on individual circumstances. Tax reliefs depend on the investments maintaining their qualifying status for Business Relief. This scenario is for illustrative purposes only and should not be construed as investment or tax advice.