Heads up! Significant changes are coming to how unused pension funds and death benefits are treated for Inheritance Tax (IHT) purposes.
From 6 April 2027, most unused pension funds and death benefits will be included in a person’s estate for Inheritance Tax purposes. This measure is designed to address pension schemes being increasingly used and marketed as a tax planning vehicle rather than solely for funding retirement. It also aims to remove inconsistencies in the Inheritance Tax treatment of different types of pensions.
Who is likely to be affected?
• Individuals inheriting estates that include unused pension funds or death benefits.
• Personal representatives, their advisors, and pension scheme administrators.
• Crucially, personal representatives will be liable for reporting and paying any Inheritance Tax due on these unused pension funds and death benefits. This is a change from an earlier proposal to have pension scheme administrators liable.
What’s excluded from these changes?
• Death in service benefits payable from a registered pension scheme.
• Dependant’s scheme pensions from a defined benefit arrangement or a collective money purchase arrangement.
• Existing IHT principles providing exemption for death benefits passing to a surviving spouse or civil partner, and registered charities, will also be maintained.
Potential Impact:
• Most estates will continue to have no Inheritance Tax liability after 6 April 2027.
• However, for those that are affected (estimated to be around 10,500 estates newly liable for IHT and approximately 38,500 paying more IHT in 2027 to 2028), the average Inheritance Tax liability is expected to increase by around £34,000 when pension assets are included in the value of the estate.
• Personal representatives will face additional administration, as they will need to collect and share information from all pension schemes and pension beneficiaries.
• HMRC plans to mitigate this impact by providing clear guidance, a calculator, and a straightforward system to pay the tax liability.
It’s important to note that these estimates are static and do not account for potential behavioural changes, such as tax planning or drawing down pension funds faster, which may reduce the number of estates affected.
Stay informed and consider how these changes might impact your future financial and estate planning!
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