For many people, pensions have been a smart way to manage Inheritance Tax (IHT) and pass on wealth efficiently. But new rules announced in the 2024 UK Budget mean that strategy is about to face a shake-up. From April 2027, unused pension funds will be brought into the scope of IHT – a significant change that could affect how families plan for the future.
The current position
Under the rules in place now, pension pots that haven’t been drawn down are treated differently depending on the age of the pension holder at the time of death. If you pass away before the age of 75, your unused pension can be inherited entirely tax-free. If you die after 75, your beneficiary pays Income Tax at their marginal rate when they access the funds.
Crucially, most pensions are currently held in trust and don’t form part of your estate for IHT purposes. This makes them a valuable vehicle for minimising IHT – especially if you’ve got other sources of income to rely on in retirement.
What’s changing in 2027?
Starting in April 2027, the value of any unused pension fund left when you die will be included in your estate for Inheritance Tax purposes. If the total value of your estate (including your pension) exceeds the IHT threshold, tax will be payable, likely at the standard 40% rate.
Responsibility for reporting and paying the tax will fall to the pension provider or scheme administrator before any funds are passed on to beneficiaries.
And here’s the kicker – if you die over the age of 75, your beneficiaries may also have to pay Income Tax on top of the IHT, meaning some families could face a double tax hit.
Rethinking your estate plan
This change could impact anyone who has factored their pension pot into long-term tax planning. While assets left to a spouse or civil partner remain exempt from IHT, the eventual tax bill on the second death could be much higher.
Many people may now choose to start drawing down their pensions sooner, using them as a source of income or converting them to an annuity, rather than preserving the funds. Others may consider lifetime gifting or transferring other assets while exemptions and allowances are still in effect.
Why expert advice matters
Everyone’s circumstances are different. These changes are a potent reminder that keeping your estate plan under review is essential, especially with new tax rules on the horizon. At Carr Berman Crichton, we can work closely with your financial adviser to ensure your Will, pension arrangements and wider estate plan remain robust and tax-efficient.
To discuss your options and make sure your plans are future-proofed, contact our experienced private client solicitors in Rutherglen, Glasgow, today.
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