The recent Budget saw the announcement that as of April 2027, most unspent pension funds will be included in an individual’s estate upon their death, potentially subjecting these funds to Inheritance Tax (IHT).
This adjustment is estimated to impact around eight per cent of estates annually, and it brings important planning considerations for those managing substantial pension assets.
What has changed?
Under the new rules, any remaining pension funds not used before death will be added to other chargeable assets like property and investments within an estate.
For individuals with considerable pension savings, this inclusion could mean substantial IHT liabilities.
For example, an unspent pension pot of £800,000 could attract an IHT bill of up to £320,000 if taxed at the standard 40 per cent rate, depending on available allowances and reliefs.
However, there is an important exception.
Pension assets transferred to a spouse or civil partner will continue to pass tax-free.
These assets, though, will become part of the surviving partner’s estate, potentially subjecting them to IHT when passed on to other beneficiaries.
This change may require individuals to reconsider how they intend to structure their pension and estate plans, especially if leaving funds to non-spousal beneficiaries.
How to minimise IHT liabilities in light of the new rules
With changes set to be implemented in 2027, individuals may benefit from re-evaluating their retirement and estate planning strategies now. Some options to consider include:
Contributions to private and employer pensions remain a highly tax-efficient way to reduce Income Tax, and this benefit should be balanced against any new IHT considerations.
Impact on families and estates
This change is likely to impact higher net-worth individuals the most, but it may also affect families who would not traditionally be subject to IHT.
The freezing of the IHT nil-rate band at £325,000 (and £500,000 with the Residence Nil-Rate Band) until at least 2030 means that more estates are likely to exceed these thresholds.
Even when allowances are passed to a surviving spouse to reach £1 million in relief, many estates could still fall into the IHT net as a result of this policy shift.
Importance of early planning
With the nil-rate bands remaining frozen and the new rules set to take effect in 2027, it is wise to start planning sooner rather than later.
Revisiting retirement and estate plans well in advance will ensure you are prepared for these changes, reducing the risk of unexpected tax burdens for your beneficiaries.
