In the Autumn Budget of October 2024, the UK government announced significant changes to the Inheritance Tax (IHT) treatment of pensions. The proposed measures take effect from April 6, 2027. Currently, unused pension funds are exempt from IHT, allowing individuals to pass on their remaining pension wealth to beneficiaries without incurring this tax. However, under the new rules, unused pension funds and death benefits will be included within the value of a person’s estate for IHT purposes.

Key Details of the Proposed Changes:

• Inclusion in Estate Value: Defined Contribution company pension funds and death benefits will be treated as part of the deceased’s estate, making them subject to the standard 40% IHT rate above the £325,000 nil-rate band.

Personal Pensions are treated in the same way.

• Exemptions: Defined Benefit pensions, commonly known as ‘final salary’ pensions, will remain unaffected by these changes. Income tax is applicable, if the pensioners total income makes them liable to income tax, on payments made throughout the pensioners lifetime. On death there is no inheritable fund so IHT is not applicable.
• Administrative Responsibilities: From April 2027, pension scheme administrators will be responsible for reporting and paying any IHT due on unused pension funds and death benefits, shifting this duty from personal representatives and will executors.
• Financial Implications: The government projects that this reform will generate substantial revenue, estimated to increase to over £6.2 billion per year by 2047. Over the next two decades, families could pay an additional £65.4 billion in IHT due to these changes.

Rationale Behind the changes:

The government aims to restore the principle that pensions should not serve as vehicles for accumulating capital sums for inheritance purposes. The intention is to ensure that wealthier estates contribute a fair share to public finances.

Considerations for Individuals:

These changes will prompt individuals to reassess their retirement and estate planning strategies. Options such as increased pension withdrawals, gifting assets within allowable limits, or utilising other tax efficient vehicles might be considered to mitigate potential IHT liabilities. However, it’s crucial to balance these strategies against the need for financial security in later life.

If you would like to review you and your family’s IHT position call me on 07590 828227 or e.mail ken@mcneilstrevens.com