Budget 2025: The £1m Inheritance Tax Free Investment Plan Allowance
The October 2024 Budget announced new rules which will, from 6 April 2026, mean that only the first £1million invested in our independently recommended inheirtance tax (IHT) Free Investment Plans will qualify for 100% IHT relief. With the excess over £1million being eligible for relief at 50% only. Here, we consider how these new rules relate specifically to lifetime gifting.
For those in later life with significant IHT issues and potentially have invested over £1million in IHT Free Investment Plans its perhaps unsurprising that some are keen to explore options for mitigation- and the most obvious way to mitigate IHT is to make lifetime gifts to reduce the value of an estate on death.
When it comes to making gifts of IHT Free Investment Plans, professional advice will be essential as there are important tax and non-tax considerations that need to be thought through before action is taken.
Lifetime gifting
Lifetime gifts of IHT Free Investment Plans made after 30 October 2024 with death occurring after 6 April 2026 will use a proportion of the transferor’s £1m allowance – thereby reducing the amount of 100% relief available to other IHT Free Investment Plans remaining in the death estate.
For example, a lifetime gift to children, for example, on 1 October 2025 of an IHT Free Investment Plan worth £2,500,000 will represent a failed potentially exempt transfer (PET) if the donor dies say on 1 October 2028, with relief of 100% only applying to the first £1,000,000. The remaining £1,500,000 of the failed PET - as well as any other IHT Free Investment Plans forming part of the death estate – will benefit from relief at the lower 50% rate only.
The proportion of the failed PET that is not relieved will use the Nil Rate Band with the balance subject to 40% IHT (less any taper relief if the PET has been survived by more than 3 years).
The availability of relief to a failed PET assumes that the transferee still owns the IHT Free Investment Plan at the date of the transferor’s death. Where the IHT Free Investment Plan has been surrendered in the interim period, the IHT relief will be ‘clawed back’ in accordance with the relevant tax rules.
The good news is that we have HMRC confirmation that the £1m allowance for individuals will refresh every seven years on a rolling basis. This provides relatively younger later life investors who are in good health the opportunity to pass IHT Free Investment Plans well in excess of £1m to the next generation over a longer period without any IHT at all. For example, a 60-year old investor in a IHT Free Investment Plan valued at £3m, could conceivably gift shares in the plan to the value of £1m to their children today, a further £1m to their children in 7 years’ time and the remaining £1m to their children on death if he also survives the second gift by 7 years. All without any IHT becoming payable either in his lifetime or on his death. Of course, capital gains tax and other tax and non-tax considerations may apply depending on his circumstances and independent professional advice will therefore be necessary to determine the suitability of this strategy.
Over the next few weeks in the lead up to the Budget on 26th November we will be providing insightful commentary and advice for those in later life. This can be best accessed reviewing our regular blog articles and commentary on the Harold Stephens website and social media channels. Check out ‘Harold Stephens IFA’ on You Tube and subscribe to the channel to get the very latest videos direct from Richard Higgs, later life financial planning specialist.
Finally, register and reserve your place at one of our 2 post-budget Later Life Financial Planning live events to be held on Wednesday December 3rd 2025 by emailing office@haroldstephens.co.uk.