British families are being warned to prepare for significant increases in their pension tax bills, with a new 40% inheritance tax on pensions scheduled to take effect from April 2027.
The New Pension Inheritance Tax Rules
Under current rules, pensions are not considered part of your estate for inheritance tax purposes. However, this protection is set to disappear following Chancellor Rachel Reeves's announcement in last year's Autumn Budget.
The legislation has already been drafted to make pensions liable for inheritance tax from 6th April 2027, according to Penny Cogher, partner at law firm Irwin Mitchell. The 40% tax will apply to any total inherited assets above certain thresholds.
Ms Cogher advised affected families: "If this is an issue for you - and it does only seem to be a problem for the minority of the population - then start taking action now. There's still time to do some planning before April 6, 2027."
Potential Further Changes in Autumn Statement
Experts warn that additional inheritance tax changes could be announced in Chancellor Reeves's upcoming Autumn Statement on Wednesday, November 26.
George Williamson, CEO at family loans firm Level Group, highlighted several potential modifications the government might introduce:
- Reducing the tax-free allowance below the current £325,000 threshold
- Cutting the additional £175,000 allowance for passing on main residences to direct descendants
- Changing gifting allowances, including potentially reducing the '7-year rule' to fewer years
- Introducing staggered tax bands of 30%, 40%, and 45% instead of the flat 40% rate
Couples currently benefit from combined allowances up to £1 million when passing unused allowances to surviving partners, but this could be substantially reduced under new proposals.
Current Inheritance Tax Planning Options
Under existing rules, individuals can still utilise several tax-free gifting options:
- Annual £3,000 gift allowance that can be divided between any number of people
- Unlimited gifts of up to £250 to different individuals
- The seven-year rule for larger gifts
- 36% inheritance tax rate for estates leaving at least 10% to charity
Mr Williamson cautioned: "There's wide speculation that the budget will see increases to the amount of inheritance tax raised through a variety of methods. Everything beyond the confirmed April 2027 pension changes remains speculation, but prudent planning is essential."
Families with substantial pension pots are urged to seek professional financial advice to navigate these upcoming changes and protect their legacies from the new tax regime.
