From 6 April 2027, unused pension pots and certain death‑in‑service benefits will be swept into the UK’s Inheritance Tax (IHT) regime for the first time.
This significant reform closes the door on a previously solid tax-efficient way of investing funds and has raised some concern among many who have built up substantial pensions over the years.
We take a look at what the changes are and how they stand to impact your finances.
How will pensions now be impacted by Inheritance Tax?
Under current rules, pension pots were not considered part of a person’s estate for IHT and could be passed onto an heir without running a risk of financial penalty.
The 2024 Autumn Budget announced that from 6 April 2027 such “unused” pensions will be treated like any other asset when calculating liable estates.
Personal representatives, or executors will now be responsible for valuing, reporting and paying IHT on these pension funds.
There will be a strict six‑month deadline to file returns and settle tax otherwise the family risk facing penalties.
However, these executors are often grieving family members who are not likely in the best headspace to deal with tax filings while mourning their loss.
This was why the move faced considerable backlash, yet the Government has declared it will press on regardless.
How will the changes impact my family?
By bringing pension savings into the IHT net, an estimated 10,500 estates that previously paid no IHT will become liable.
Alongside this, a further 38,500 estates will see higher bills as the changes will add roughly £34,000, on average, to their liability.
All of this fails to factor in the additional emotional turmoil of the ruling.
There had been some hope that pension providers could handle the IHT bill on behalf of families, but this is no longer set to be the case.
The increased scope of IHT increases the administrative burden on families that are experiencing loss, and it seems like a missed opportunity to provide relief for struggling families.
For those approaching retirement or who have recently retired, there could be some concern that their funds are misplaced.
With these changes disrupting a previously versatile way of investing money without risking an elevated tax bill, many families will now be reassessing their financial plans.
During these difficult times, it would be wise to seek professional financial advice to ensure that your tax bills can be kept as low as possible.
There is still time to address where your money resides ahead of the implementation of the policy in 2027.
Your money should help you and your family, and we can help make sure that you retain control over your financial future.
Take back control of your family’s finances. Speak to our team today!
