Are you prepared for the rising Inheritance Tax bill?

Neil Richardson, Dental Regional Manager at Wesleyan Financial Services, outlines upcoming changes to Inheritance Tax liability and why there’s a heightened interest in the topic within the media…

As a dentist or practice owner, much of your valuable time is dedicated to prioritising the care of your patients and running your practice. But there’s another important issue which you are likely aware of but have not had time to consider fully: Inheritance Tax (IHT) liability.

With the IHT threshold frozen at £325,000 until 2030, it's increasingly likely that more people will find themselves caught in the IHT net. For dental professionals and other high earners, this can mean a significant tax burden on the value of your estate when you pass away. That’s not the legacy you’ve worked hard to leave behind.

The rising impact of IHT on dentists and practice owners

Inheritance Tax is charged at a rate of 40% on the value of your estate that exceeds the IHT threshold. The key issue here is that the threshold has been frozen at £325,000 for the foreseeable future.

While the figure itself may seem substantial, inflation and rising property prices mean that the value of your estate could easily surpass the threshold, particularly as a practice owner, leaving your beneficiaries with a hefty IHT bill.

But that's not all. In April 2027, a significant change is set to occur that could increase the number of people caught by IHT. Currently, money left in pensions upon death is exempt from IHT. However, this exemption is expected to be closed in 2027. This change, announced in the Autumn Budget last year, could pull many dentists with substantial pension pots into the IHT net, meaning your hard-earned pension could be taxed after you pass away.

It's important to note that this is a proposed change under consultation, which only recently closed on 24 January. More details on exactly how this will be implemented are expected to come out later this year.

Why now is the time to plan

With these developments in mind, now is the time to start thinking about your estate planning and how to minimise your IHT liability.

IHT receipts are likely to continue rising each year as more estates rise above the threshold. According to recent data released by Her Majesty’s Revenue and Customs, we’ve already seen an uptick in IHT receipts, and it’s expected to increase in coming years as more estates are caught by the tax.

Pensions have traditionally been a useful way to build wealth without incurring IHT. However, as mentioned earlier, in April 2027, the exemption for pension pots upon death is due to be removed, meaning pension funds will be subject to IHT. If you have a substantial pension pot, now is the time to review your pension strategy and start a conversation about how you might offset this upcoming change.

Estate planning can be complex, especially when it involves significant assets like a dental practice or pension pot. Working with a financial adviser who understands IHT planning and the nuances of a career and subsequent earnings in dentistry can be hugely beneficial.

As a dental practice owner, your business is likely to be one of your most valuable assets. If you haven’t already, it’s important to think about how your practice will be passed on.

Many practice owners may already be considering giving away assets during their lifetimes to reduce the value of their estate and minimise the IHT burden. Gifting strategies and setting up trusts, while having the potential to reduce IHT liability, do have rules and exemptions that need careful consideration.

Then, whether you want to sell your practice or leave it to family members, creating an exit strategy is crucial and can help ensure that the transfer of your practice doesn’t trigger an excessive IHT bill, as well as added stress for loved ones during what will undoubtedly be an already emotionally turbulent time.

While considering the estate planning element of your practice, it may be worth setting up or reviewing your partnership agreements at the same time.

If something were to happen to you, do you have a clear understanding of the next steps for business continuity? Carefully consider whether the correct protections are in place to allow your partner to buy out your share of the business, or potentially risk losing the legacy you’ve built for your loved ones.

A dental specialist financial adviser can help you navigate the rules, identify tax-efficient strategies, and ensure your estate is distributed according to your wishes while minimising the IHT liability.

You can start a conversation with a dental Specialist Financial Adviser at Wesleyan Financial Services by visiting our website or calling 0808 149 9416.

Neil Richardson is a Dental Regional Manager at Wesleyan Financial Services, guiding a team of dental Specialist Financial Advisers to support dentists, their families, and their practices with financial planning to secure their financial future.

Wesleyan Financial Services Ltd (Registered in England and Wales No. 1651212) is authorised and regulated by the Financial Conduct Authority. Registered Office: Colmore Circus, Birmingham B4 6AR. Telephone: 0345 351 2352. Calls may be recorded to help us provide, monitor and improve our services to you.