At 42, I’m Already Planning To Limit My Family’s Inheritance Tax Bill

Despite being more than 20 years away from retirement, dad-of-three Zahid Razzaq is worried about the impact of inheritance tax (IHT) on his family when he passes away.

The 42-year-old IT contractor, who lives with his wife and three children in Manchester, estimates his estate is currently worth between £750,000 and £1m, depending on how the price of his houses is calculated.

His wealth is largely tied up in property and pensions.

Zahid owns a four-bedroom detached family home in Manchester, as well as a three-bedroom rental property in Birmingham, which he bought for £140,000 in 2009 and now lets out for additional income.

The 42-year-old has around £100,000 in a private pension and savings of roughly £15,000 to £20,000.

He’s only started worrying about IHT in the last couple of years, partly due to planned changes from 2027, when unused pension funds are expected to be included as part of estates for IHT purposes.

At present, IHT is typically applied to estates worth more than £325,000, although this can rise to £500,000 when passing on a main residence to direct descendants. Couples can combine their allowances, meaning up to £1m can be passed on tax-free.

Anything above these thresholds is usually taxed at 40 per cent.

“I never thought about inheritance tax,” he says. “But it’s going to be a problem for my family in the future. It does make me concerned.”

One option he is considering is turning his pension savings, which are a combination of different pots with PensionBee, into a Small Self-Administered Scheme (SSAS).

An SSAS allows someone to invest their pension in commercial property and make their family the beneficiaries.

Pensions are currently not in the scope of IHT; however, it’s unclear how HMRC plans to treat these schemes after the rules change in April 2027, with some experts cautioning against using them solely as a tool to cut an IHT bill.

“An SSAS is generally run by a family or small company and the defined benefit version – which offers a guaranteed income in retirement – is a very flexible pension scheme – but they are also expensive,” says Andrew King, retirement planning specialist at Evelyn & Partners.

“I would not recommend someone doing this purely on the basis of it being free from IHT before the rules are clarified.

“However, there are other benefits, such as being able to invest in commercial property and being free from capital gains tax, which may be attractive.”

Zahid has also considered other options, such as gifting assets during his lifetime, as these gifts become tax-free if you survive seven years after giving them.

Gifts made less than seven years before death may be subject to a tapering tax rate of 8 per cent to 40 per cent.

But he says he would prefer to retain control of his wealth for now.

Anyone considering ways to protect their wealth should get advice from a financial adviser or estate planning specialist.

Zahid wants to ensure his family benefits from the wealth he has built up over decades of work – rather than facing a possibly large IHT bill.

He added: “You work hard all your life to make life easier for the future.”

“If you know that 40 per cent is going to go to the government then it’s quite disappointing.”

Recent research from wealth manager Saltus highlights growing concern that IHT is increasingly pulling in “middle Britain” as well as the wealthy.

The nil-rate band -the amount you can pass on without facing an IHT bill – has been frozen at £325,000 since 2009, despite sharp rises in property and pension values, and analysis suggests it would now stand at around £581,000 if it had continued to increase in line with pre-2009 trends.

As a result, more estates are being caught by the tax without any formal change in rates – a phenomenon often described as “stealth taxation”.

Among high net worth individuals, eight in ten believe the threshold should either be raised or abolished entirely, with many arguing it should be closer to £1m.

Maike Currie, vice president of Personal Finance at PensionBee, said: “Beyond pensions there are other tools worth considering, such as gifting with annual exemptions, business relief on qualifying assets and making sure wills and trust structures are in order.”

Zahid has not discussed the details of his finances with his children, saying he does not want them to rely on inheritance.

He added: “I don’t want them to have expectations”.

Despite his concerns, he believes many people are still not thinking about IHT early enough.

A Government spokesperson said: “We continue to incentivise pensions savings for their intended purpose of funding retirement instead of being openly used as a vehicle to transfer wealth. More than 90 per cent of estates each year will continue to pay no inheritance tax after these and other changes.

“We will publish further guidance and tools to support personal representatives in due course.”