Unspent pension funds and death benefits are set to be included in the value of your estate, thereby subjecting it to Inheritance Tax (IHT) liabilities.
While pensions currently aren’t part of your estate and not impacted by IHT, this will change from 6 April 2027.
It is important to understand how these changes might affect you, as the new rules around unspent pensions may push an estate value over the nil-rate band for IHT.
What does this mean in practice?
The nil-rate band for IHT sits at £325,000. For individuals with estates worth less than this threshold, they can pass them on to the next generation free of IHT.
Many people might not be impacted by these changes, provided the combined value of their estate and pensions keeps them below the nil-rate band.
However, fiscal drag means increased house prices, the addition of pensions and a nil-rate band frozen until 2031 might silently push estates towards paying IHT.
Any assets over the nil-rate band are subject to 40 per cent IHT charges.
Married couples with pensions
If a couple is married and live in the UK, the first death of a spouse still allows estates to be transferred to their partner without inheritance tax to pay.
Their nil-rate allowance is also transferred, meaning that an IHT-free allowance of up to £650,000 is available to the surviving spouse.
While unspent pensions can also be passed to a spouse without tax, the leftover funds from a second death might then be subject to the 40 per cent rate.
If both partners didn’t spend a lot of their pension, the addition of these assets to their estate might comfortably push it above the IHT threshold.
What can an accountant do?
Our accountants can help audit your estate, calculating whether the addition of unspent pensions will increase IHT liabilities.
Where old advice might have promoted saving pensions and spending other assets to minimise IHT, we can advise on new strategies that factor in the addition of pensions to estates.
If the IHT bill is expected to be significant, we can advise on whether the estate can afford to pay tax liabilities before probate, without the sale of assets.
Get in touch with our team for a review of your IHT exposure.
