Moray Wright in The i: how investors are responding to inheritance tax changes

As of next year, pensions won’t automatically escape the clutches of the taxman when there is a death.

For years, inherited pensions did not form part of an estate for inheritance tax (IHT) purposes – but that will change from April 2027 after a decision by Chancellor Rachel Reeves at her first Budget back in 2024.

From then on, retirement savings will be included when the tax bill for those inheriting money is calculated.

It means those approaching retirement with large amounts of assets and savings have to rethink their plans if they want to avoid their families being hit with a bill.

Generally, those hit by IHT are wealthier than average. The 40 per cent tax only applies to estates worth over £325,000 and there are multiple extra allowances that mean for many people it is far bigger.

You get an extra £175,000 allowance if passing on a primary home, and spouses’ pool allowances, meaning many couples can pass on £1m tax-free.

Some are starting to think about ways to shield their cash, and there is one scheme experts say many of the wealthiest are looking at more.

The enterprise investment scheme – and how it works

The Enterprise Investment Scheme (EIS) is a UK Government initiative designed to help smaller companies raise money by offering a range of generous tax reliefs to individual investors who purchase new shares in them.

There are various rules regarding the types of companies that can be involved; for example, they must have fewer than 250 full-time equivalent employees and gross assets of less than £30m at the time the shares are issued.

The tax benefits of investing are plentiful.

Investors can claim 30 per cent income tax relief – so a £20,000 investment will attract a £6,000 income tax reduction, and any gains made are not subject to capital gains tax (CGT).

Crucially, for planning your estate, EIS shares can qualify for relief from IHT. To qualify, the EIS shares must be in companies that meet business relief requirements and must be held for at least two years at the time of death.

Business relief for IHT is capped at £2.5m – shares worth less than this can face zero IHT – with any excess above this threshold taxed at a reduced rate of 20 per cent rather than 40 per cent.

Are more people using the scheme?

“There is understandable expectation that demand for EIS could increase as more estates become subject to inheritance tax,” explains Jason Hollands, managing director at Evelyn Partners. Hollands says he is already seeing “growing interest” in the scheme.

Moray Wright, CEO at Parkwalk Advisors, which manages several EIS funds, says the organisation is seeing an increasing number of savers using their pension lump sum to invest in companies via its funds.

“For the right investors, it’s becoming a key strategy in their financial planning, especially as other tax wrappers tighten,” he says.

Read the full article in The i Paper.

To find out more about how EIS works, visit our EIS Knowledge Hub.