Changes to Inheritance Tax - Pensions

In the October budget the government announced radical changes which will increase the amount of IHT likely to be due on a great number of estates including those of individuals who have invested (sensibly) in a private pension fund.

The Changes

Under the current rules, private pensions fall outside of an individual’s estate for the calculation of IHT on their death. This means that no IHT charge is levied on the fund when the pension holder dies.

A beneficiary of the pension fund can choose either to take a regular income or a lump sum from the pension. The lump sum will be subject to income tax if over a certain amount (currently £1,073,100 for most individuals) but if the deceased died before age 75 then the beneficiary could also take the income from the fund free of income tax.

From 6 April 2027, any balance remaining in an individual’s pension fund will become part of the individual’s estate and therefore subject to IHT at 40% over the nil rate band threshold (frozen at £325,000 until April 2030).

Under the new rules, a pension pot for example of £1,000,000 which could have passed free of tax (dependent on the age of the individual and the way the funds were taken) would instead potentially be reduced by £400,000 in the form of the IHT charge.

What can we do?

• Review death benefit nominations and ensure these are kept up to date. Ensuring you have the correct beneficiaries nominated is crucial as you cannot provide for how the pension funds are distributed under your Will and un-nominated beneficiaries can only receive a lump sum (not income).
• Consider nominating your spouse as a potential beneficiary (if they are not already) as any pension funds passing to a surviving spouse will be IHT exempt.
• Consider any funds held in a pension to be part of the ‘pot’ from which to make lifetime gifts or for funding retirement expenses but be mindful of the lump sum allowance (currently £268,275) as exceeding this will result in income tax charges.
• Use the pensions in drawn down in a tax efficient way to make regular gifts from income. These gifts would then be IHT exempt under the ‘gifts from normal expenditure of income’. If you wish to do this it is important to record the intention specifically (and keep records of your income and expenditure).

Unfortunately the changes to the IHT rules are likely to mean more estates will be subject to an IHT charge by 2027/28 but with careful planning (including consultations with your pension provider, financial advisor and solicitor) the funds can instead be used as a way of make tax efficient lifetime gifts.

To book an appointment or to discuss further please contact Lucy Wright on 01732 3752340.

This article is for general information only and does not constitute legal or professional advice. Please note the law may have changed since this article was published.

We do not accept responsibility or liability for any actions taken based on the information in this article.