Inheritance tax (IHT) and Pensions

Significant changes to the inheritance tax (IHT) treatment of private pensions, are set to take effect from 6 April 2027. That’s notwithstanding the fact that IHT thresholds are now due to be frozen until 2030.

Key changes to inheritance tax on private pensions

Currently, private pensions are typically excluded from a person’s taxable estate for IHT purposes, allowing them to be passed to beneficiaries without incurring IHT.

However, starting from 6 April 2027, most unused pension funds and death benefits will be included within the value of a person’s estate for IHT purposes. This means that the value of your private pension could be subject to the standard IHT rate of 40% on amounts exceeding the existing thresholds.

Several measures were announced in the Autumn Budget 2024

In the Autumn Budget 2024, the government announced several measures to reform Inheritance Tax. This included a measure to bring most unused pension funds and death benefits within the value of a person’s estate for Inheritance Tax purposes from 6 April 2027.

From 6 April 2027 most unused pension funds and death benefits will be included within the value of a person’s estate for Inheritance Tax purposes and personal representatives will become liable for reporting and paying any Inheritance Tax due on pensions to HMRC.

The inheritance tax threshold freeze was also extended from 2028 to 2030. This will mean the IHT threshold is unlikely to increase with inflation, potentially bringing more estates into the scope of IHT over time.

For those who have incorporated private pensions into their estate planning strategies, it’s crucial to understand these changes and consider revisiting your plans to help ensure they remain effective.

Current IHT thresholds and rates

Currently the IHT thresholds and rates are:

Nil-Rate band (NRB): £325,000 per individual.

Residence Nil-Rate Band (RNRB): An additional £175,000 per individual, applicable when passing a primary residence to direct descendants.

IHT Rate: 40% on the value of the estate exceeding the combined NRB and RNRB thresholds.

Given these changes, it may be advisable to evaluate how the inclusion of private pensions in your taxable estate (from April 2027) will impact your overall IHT liability before the new rules come into effect and look at alternative strategies.

The Financial Conduct Authority (FCA) does not regulate Inheritance Tax Planning, Tax and Trusts.

The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future.