IHT on Pensions to Change in 2027 – Introduction
Inheritance tax is often called Britain’s most controversial levy, and for good reason.
Over the years, pensions have been considered one of the more tax-efficient ways to pass on wealth, often avoiding inheritance tax entirely.
But from 2027, significant changes are on the horizon that will make pensions subject to inheritance tax in certain cases.
Let’s explore the details of this upcoming rule change and its implications.
The Current Rules
At present, pensions sit outside of your estate for inheritance tax (IHT) purposes.
This has made them an attractive tool for passing wealth between generations.
If you die before the age of 75, the funds in your pension can be passed on tax-free to your beneficiaries.
Even if you die after 75, they’ll only pay income tax on withdrawals at their marginal rate, rather than the 40% IHT charge.
This favourable treatment has often been used by savvy individuals to manage their wealth, leaving pensions untouched and living off other income sources to maximize the tax efficiency of their estate.
What’s Changing?
From April 2027, pensions will no longer automatically sit outside the inheritance tax net.
Instead, they will form part of the deceased’s estate and could attract the standard IHT rate of 40% if the estate value exceeds the nil-rate band (£325,000 as of 2024).
The government has announced consultations on how these changes will be implemented. Key points under discussion include:
- Scope: Whether all pension types (e.g., defined contribution, defined benefit) will be affected equally.
- Exemptions: Whether there will be carve-outs for smaller pension pots or pensions used as primary income.
- Timing: How the new rules will apply to existing pensions versus new contributions.
The Impact on Beneficiaries
For many families, these changes could significantly reduce the value of inherited wealth. Consider a pension worth £500,000:
- Under current rules, this would pass tax-free (if the deceased was under 75) or only incur income tax on withdrawals.
- Post-2027, the same pension could incur a £70,000 IHT bill if it pushes the estate above the nil-rate band.
Strategies to Mitigate the Impact
Planning ahead will be crucial to minimizing the impact of these changes. Potential strategies include:
- Utilising Gifts and Exemptions: Making use of annual gift allowances and the seven-year rule to reduce the taxable estate.
- Spousal Transfers: Spouses remain exempt from IHT, so passing pensions to a spouse first could delay the tax charge.
- Trusts: Setting up pension trusts, though this may have its own tax implications.
- Reviewing Pension Contributions: Those nearing retirement may want to reconsider how much they contribute to pensions if the tax benefits are reduced.
IHT on Pensions to Change in 2027 – Conclusion
The inclusion of pensions in inheritance tax planning from 2027 marks a significant shift in how families manage and transfer wealth.
While the exact details are still under consultation, the potential impact is clear: less wealth passed to loved ones and more tax revenue for the Treasury.
Families and advisers alike should start reviewing estate plans now to stay ahead of the changes.
Final Thoughts
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