Inheritance Tax (IHT) has been steadily pulling in more estates through the recent changes and with unspent pension pots next in line, even more people will be impacted.
HMRC has caused concern with its confirmation of how these unspent pension pots could be managed when handling an IHT bill.
The proposals may result in more inheritance tensions, so it may be necessary to adjust estate plans to mitigate this.
How should unspent pension pots be handled for Inheritance Tax?
From April 2027, unspent pension pots will be included in the calculations for IHT when assessing the full value of a person’s estate.
HMRC has announced that it will be possible for a pension scheme to withhold up to 50 per cent of an individual’s benefits to cover an IHT bill.
While it might seem like an effective way of handling an IHT bill, there are concerns that this will result in increased tensions.
Estate executors will be the ones in a position to instruct the pension scheme and doing so could preserve other assets by ensuring there is no need to sell them.
However, estate executors are often close family members, so there is a concern that they are the ones most likely to have assets to preserve.
By shielding those assets with the unspent pension pots, friends and other relatives may miss out if the remaining funds are not sufficient for meeting their originally assigned share of a person’s estate.
At this point, it is probable that some people may dispute the way that inheritance was handled to ensure that they still receive a fair share of what they were supposed to get.
This could then see assets being sold off after all.
How can unspent pension pots be handled in Inheritance Tax?
It depends on how a person wants to view their estate.
Some may find that having an unspent pension pot as a slush fund to tackle IHT bills is reassuring, while others would prefer to not have additional money inflating their exposure.
Individuals need to consider how IHT will affect their specific estate by understanding the combined value of assets and property, as well as any unspent pensions they may have.
Our team can support you in understanding your position by helping you to assess the scope of your IHT bill.
From there, we can advise you on how to mitigate it through restructuring your estate or gifting assets.
Only through tailored, professional support can you retain control over your estate and manage your IHT bill.
Get in touch with our team for support that may help reduce the risk of Inheritance Tax fuelled disputes.
