Reforms announced in the Budget to include unused pensions in Inheritance Tax from 2027 have rightly prompted concern and fears for those planning how to pass on their estate to their family – but don’t do anything rash just yet!
This is because HMRC is running a consultation on these proposals until January 22, 2025 and it is open to anyone, so please do have your say if you have any concerns on how this may affect bequeathing your estate to the next generation. The link is below.
What are the plans? In a nutshell, the Chancellor has announced IHT will be imposed on pension assets passed on after death from April 2027.
A spouse or civil partner can receive any scheme death benefits without IHT being applied, but otherwise, when a person dies their pension funds will be treated as part of their estate and taxed accordingly.
It’s somewhat complicated (of course!) but currently most UK pension schemes are outside the scope of Inheritance Tax and pensions had been a fantastic vehicle for IHT planning.
Some may feel this (legal) tax avoidance is wrong – however if a person has worked hard and wishes to pass on something tangible to their children or dependants, why would they not? Would anyone do anything different?
An online example quoted by citywire.com is of a £350,000 pension pot that could be hit by almost 90% tax. Someone with a pot of £350,000 and an estate of £2million will lose their residence nil rate band of £175,000, which is reduced by £1 for every £2 over a £2m estate.
If a pension is withdrawn as income by the beneficiary after death, further Income Tax is applied – with the additional rate income taxpayer in England, Wales and Northern Ireland incurring a tax at 45%, meaning they would see as little as £36,787 from that pot.
So what can you do? Right now the advice is still to wait and see because the consultation is still running and presumably there will be a few months to draw up the specific plans.
This does nothing to help with longer term financial and estate planning but taking the funds now and early isn’t necessarily a sensible idea as pensions still grow free of all tax, so the gross roll-up has a value, whereas having cash in your hands will be subjected to taxes.
There are strategies such as gifting parts of your estate to others, assuming you do not pass away for seven years after the gift and we are likely to see more of these. They are not always the best solution for various reasons and it is important to discuss any such plans with a financial adviser before pushing ahead.
If your estate is going to people who are not a spouse, life insurance could offset whatever IHT bill will hit your beneficiaries. This would also be an advantage if you pass away unexpectedly while a seven year ‘gifting’ period was still running.
There will no doubt be ways and means to mitigate these new measures and do your best for your dependents, once we know the nitty gritty following the results of the consultation.
You can be assured we will be having our say too and will carefully scrutinise what it all means for our clients once the final legislation is known. As any good financial adviser will have done, we have provided all our participating clients with detailed guidance on ramifications which may affect them. In the meantime and apologies for the long link but you can find out more and have your say here: www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/technical-consultation-inheritance-tax-on-pensions-liability-reporting-and-payment
