Toby Larkman, Managing Director, Wealthtime

The latest figures from HMRC show inheritance tax (IHT) receipts reached £2.2 billion in the second quarter of 2025, an increase of £0.1 billion compared to the same period last year[1]. IHT receipts are expected to rise even further once unspent pension savings are brought within the scope of the tax from April 2027, with the Office of Budget Responsibility estimating it will raise £1.46 billion a year by 2029/30[2]. This change will disrupt long-standing expectations among retirees who had hoped to pass on their entire remaining pension pot to loved ones when they die. The government aims to return pensions to their original purpose of providing retirement income, rather than serving as a tool for estate planning.

With 2027 fast approaching, now is a critical time for advisers to proactively explore alternative strategies to minimise taxation on client estates. These are some of the options currently available to help manage client IHT exposure effectively.

Enterprise Investment Schemes (EISs)

EIS investments benefit from the UK government’s impetus since 1994 to inspire investing in small high-risk companies by providing tax breaks. Investors enjoy up to 30% income tax relief, tax-free growth, deferred capital gains, loss relief on exit, and possible IHT exemptions. In short, EIS can help reduce clients’ tax liabilities while supporting innovation and early-stage UK businesses.

Minimum investment is generally around £10,000, and you may need to have been with a provider for a period of time, but this varies by investment manager. The maximum investment is normally £1m per tax year, or £2m if this involves ‘knowledge-intensive’ companies.

Offshore Bonds

Offshore investment bonds can offer a flexible and tax-efficient way to manage wealth, particularly for clients with longer-term horizons or more complex estate planning needs. These bonds are issued by insurers in jurisdictions such as the Isle of Man or Dublin and allow investments to grow free from UK income and capital gains tax under the principle of gross roll-up.

Investors can withdraw up to 5% of the original investment annually for 20 years without triggering an immediate tax charge, making them useful for income planning. When held within a suitable trust, offshore bonds can also help reduce the value of the taxable estate over time. Additionally, they can be segmented, allowing for flexible gifting or assignment to beneficiaries.

While they do form part of the estate for IHT purposes unless placed in trust, offshore bonds remain a versatile option for those seeking tax deferral and estate planning flexibility.

Discounted Gift Trusts (DGTs)
A DGT allows individuals to make a lump-sum gift into a trust while retaining the right to receive a fixed, regular income for life. The “discount” refers to the calculated value of the retained income stream, which is immediately excluded from the estate for IHT purposes. The remaining portion of the gift is treated as a Potentially Exempt Transfer (PET) and will fall outside the estate after seven years.

DGTs are particularly useful for clients who wish to reduce their estate’s IHT liability but still need access to a reliable income. They also provide a structured way to pass on wealth to beneficiaries, often with the added benefit of professional trust management and control over how and when funds are distributed.

Lifetime Gifting
And of course, gifting during the client’s lifetime is a tried-and-tested method of reducing the value of an estate for IHT purposes. Several exemptions are available, including the ability to make regular gifts from surplus income, such as pension income and investment interest or dividends, provided they do not affect the client’s standard of living. Larger, one-off gifts are treated as PETs and become fully exempt if the individual survives for seven years.

Used strategically, lifetime gifting allows clients to pass on wealth tax-efficiently while seeing loved ones benefit in real time.

These options are well worth considering as alternatives to leaving unused pensions to children or grandchildren, given the impending changes to IHT in 2027. Although the government has now published its response to the post-Budget consultation, the final rules are still pending. A cautious and client-specific approach remains essential, particularly regarding risk tolerance and suitability.

Ultimately, there’s wisdom in the old saying “don’t let the tax tail wag the dog”. It makes sense to stick to the goals set out in the financial plan in terms of living well in retirement and passing on wealth in an efficient manner. And of course, tax rules are subject to change, and tax advantages depend on individual circumstances.

This article is intended for regulated financial advisers and investment professionals only. Wealthtime does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such.

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[1] https://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk/hmrc-tax-receipts-and-national-insurance-contributions-for-the-uk-new-monthly-bulletin#inheritance-tax-iht

[2] https://www.gov.uk/government/publications/reforming-inheritance-tax-unused-pension-funds-and-death-benefits/inheritance-tax-on-unused-pension-funds-and-death-benefits?utm_source=chatgpt.com#summary-of-impacts