Owen Byrne
- Partner
- Private Client
Inheritance tax on pensions is changing: how to prepare before 2027
As announced in the October 2024 Budget, from 6 April 2027, most unused pension funds will fall within the scope of inheritance tax (IHT), replacing the long-established position that pension pots are generally outside of a deceased person’s estate for IHT purposes. Clients and advisers have much to do before these reforms take effect.
Commentary has increased in the last month or so: ‘Inheritance Tax on pensions has triggered a middle class panic’ said The Sunday Times in its Money section.
The House of Lords Economic Affairs Committee also published a report at the end of January which challenged the government on how the changes will be implemented.
Action now
Pension funds have always been an important part of succession planning.
In high-net-worth families, where a surviving spouse or civil partner might not need provision from the pension fund, pension funds are often allocated directly to children or grandchildren, because they can pass free of IHT. That clearly remains good planning until 5 April 2027.
Come 6 April 2027 however, giving such pensions to children and grandchildren would incur an IHT charge of up to 40%. Those affected may therefore want to change their nominations in order for the pension to pass to a surviving spouse or civil partner free of IHT, to defer the IHT charge until the survivor’s death.
Nominations and letters of wishes need updating accordingly, and we can help clients with that.
It is especially important to keep nominations under review where, for example, you might have allocated the pension fund to a certain (non-spouse/civil partner) beneficiary rather than provide for them under your Will. The amount that beneficiary would inherit post 6 April 2027 would be greatly reduced and you might want to reconfigure your estate planning accordingly.
Timeframes and added cost
Private client advisers and the House of Lord’s Committee mentioned above are unified in calling for government to revisit the structural framework for IHT payment, especially once pension funds form part of the IHT net.
It is estimated that the pension changes will bring 49,000 estates within the scope of IHT for 2027/28 alone. That means a lot more paperwork for pension trustees, HMRC and personal representatives (PRs) of those who have died.
There will also be added cost for the administration of estates. Valuation issues will arise, especially where a pension fund might hold illiquid shares or a commercial property. Moreover, because the PRs are responsible for paying the tax, they will have to corral pension trustees to provide information, and given IHT allowances will be shared between pension assets and other assets, more co-ordination is needed where previously it was not.
Of greatest concern is that the timeframe for payment of IHT on pension assets will remain six months from the end of the month in which the deceased died, and interest on unpaid IHT is currently running at 7.75%. The House of Lord’s Committee called for an extension of the deadline from six to 12 months, and for ‘safe harbour periods’ on interest.
The feeling is that the government has brought an awful lot more estates into the IHT net without full exploration of the ability of the system to cope with such changes.
We keep a watching brief on our clients’ behalf.
If you would like to discuss how the proposed pension and IHT reforms will affect your estate planning, please contact a member of our private client team or your usual Wedlake Bell adviser.
This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.
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Sarah Turner
- Associate
- Private Client