Preparing for inheritance tax reform: what schools, charities and donors should know

In April 2027 HM Revenue & Customs (HMRC) could broaden what is included in an individual’s estate for inheritance tax (IHT) purposes. This is prompting many people to assess their current financial plans. Under current rules, the nil-rate band, which is the amount that can be passed on free from inheritance tax, is £325,000 per person, or up to £650,000 for a married couple or civil partners. There are also important exemptions, including assets passed between spouses and certain allowances relating to a primary residence.

From April 2027, unused pension funds are expected to be included within an individual's estate for inheritance tax purposes. As a result, more estates could become liable for IHT, which is currently charged at 40%. This has led many people to review how and when they pass on wealth to family members and charitable causes.

One option many are considering, when it comes to wealth transfer planning, is making lifetime gifts through potentially exempt transfers (PETs). A PET is a gift made during an individual's lifetime that becomes exempt from IHT if the donor survives for seven years after making it. If the donor dies within that period, the gift may still benefit from taper relief, depending on the circumstances.

This is particularly relevant when grandparents help to pay school fees. According to a 2023 study by Premium Credit, more than 79%¹ of financial support for school fees provided by family members came from grandparents. For some families, this support forms part of a wider estate planning strategy, enabling grandparents to transfer wealth during their lifetime while starting the seven-year clock associated with PETs.

Many people are also exploring charitable giving as part of their broader financial planning. Charitable donations can provide tax benefits both during a donor's lifetime and on death, contributing to growing interest in donor-advised funds (DAFs), lifetime giving strategies and legacy giving through wills.

For some, the proposed IHT changes have prompted discussions about how pension assets, estate planning and charitable giving may be considered together when reviewing a potential inheritance tax liability. As a result, charities are finding new opportunities to engage supporters in discussions about the causes they care about and the long-term impact of their giving.

Gifts to charities may:

• Reduce IHT liability through available tax reliefs by making charitable gifts on death (the relief available depends on your individual circumstances and the value of your estate)

• Reduce the IHT rate from 40% to 36% on the taxable portion of the estate, provided at least 10% of the net estate is left to charity on death. Tax treatment depends on individual circumstances and may change in future

Financial and estate planning form an important part of Evelyn Partners' Total Wealth Management approach. We help clients plan and make informed decisions about their wealth, including how they support the causes that matter most to them.

Our specialist charity team works with schools to develop tailored calculators that can help families understand the financial implications of prepaying some or all future school fees.

We also support schools in managing funds received through advance fee payments by helping to construct investment portfolios designed to align with their future expenditure requirements and risk objectives. Where appropriate, portfolios may include investments with defined maturity dates to help support anticipated expenditure requirements. As with all investments, the value of investments can fall as well as rise and returns are not guaranteed.

In addition, our charity specialists and financial planners work together to support conversations with donors, helping them consider significant charitable gifts within the context of their wider financial and estate planning objectives.

With the proposed IHT changes approaching, now is a good time for individuals, schools and charities to review their financial position and consider their options. Facing tax changes doesn’t have to be a challenge. Instead, it offers all of those affected by the new rules the opportunity to have educated conversations with financial professionals who can help them prepare for ‘what’s next?’ with confidence.

Whether you're reviewing your estate plans, considering charitable giving, or exploring advance fee arrangements, our specialists can help you understand the options available and plan with confidence. Book a conversation with our team.

1 Credit-connect.co.uk; Nearly half of private school parents rely on family to pay the fees; 25 August 2023