HMRC has released new details on inheritance tax changes for pensions, confirming the amendments will take effect from April 6, 2027. The changes will affect more than 10,000 households across the UK.
What are the inheritance tax changes?
From April 6, 2027, unspent pension savings will be included within the scope of inheritance tax for the first time. They will be combined with other assets such as property, savings, and investments when calculating inheritance tax due on an estate. Inheritance tax is levied at 40% on the value of an estate exceeding certain thresholds. The standard threshold is £325,000, increasing to £500,000 when a property is transferred to children or grandchildren, subject to conditions and tapering regulations. Anything beyond the available thresholds faces taxation at 40%, and from April 2027 the pension pot forms part of that calculation.
Who will be affected by the changes?
HMRC projections indicate approximately 10,500 estates will become liable for inheritance tax for the first time, with an additional 38,500 estates already subject to inheritance tax encountering increased bills averaging £34,000. Funds previously anticipated to transfer to children and grandchildren largely intact could now face a substantial tax liability. Pension savings can be liable to both inheritance tax and income tax in particular situations. When a beneficiary accesses inherited pension funds, they pay income tax at their standard rate, meaning the combined tax liability could be substantial. The state pension is unaffected; it ceases when someone dies. The change concerns private and workplace pension savings. Anything left to a surviving spouse or civil partner is still exempt from inheritance tax. HMRC states that those administering the affairs of someone who has died will be responsible for taking reasonable steps to identify the deceased's pension savings, calculate their value, and pay tax on them. Irwin Mitchell solicitors cautioned that families frequently encounter fragmented records, historic workplace schemes, and multiple providers.
What steps can individuals take regarding the changes?
The initial step is obtaining a comprehensive understanding of an estate's actual value, totalling pension savings together with property, investments, and other assets to determine whether the sum is likely to surpass the available thresholds. Checking who is designated as a beneficiary on pension schemes is also worthwhile to ensure those particulars still match current intentions. Several strategies merit consideration. Transferring money to family members during an individual's lifetime represents one option. Gifts given more than seven years prior to death are typically exempt from inheritance tax, and even gifts given between three and seven years before death may qualify for taper relief, which diminishes the tax liability on a sliding scale. Trusts can also serve a purpose in estate planning for certain individuals, though the regulations surrounding them are complicated and the tax consequences depend substantially on personal circumstances, so professional guidance is worth obtaining before pursuing that avenue.
