Pensions and Inheritance Tax – April 2027 Changes

From 6 April 2027 new Inheritance Tax (IHT) rules are expected to be introduced that will mean that unspent pensions will be included in the value of an individual’s estate when determining their IHT position. This means unspent pensions that could have been previously passed over free of IHT could now potentially be subject to a IHT charge of 40%!

Inevitably, the forthcoming change announced has caused people to review their plans for their pensions, with some individual’s drawing down on their pots and transferring funds over, to avoid these funds becoming subject to IHT. However, care needs to be taken, as whilst up to 25% of the value of the pension pot can be taken free of income tax, the remaining amount will form part of an individual’s taxable income for the year.

The above would mean the amounts taken would be subject to income tax at 20%/40% or 45% and may impact other tax areas, such as shifting investment income into the higher rate tax bands and beginning to see the Personal Allowance tapered away (if income exceeds £100,000). Therefore, before making any withdrawals we would recommend careful income tax planning takes place, so that you are aware of the full tax impact of taking your pension earlier than initially planned.

Despite the above, the pension withdrawals may still be worthwhile, especially when considering that IHT could apply at 40% if the pension is left in the estate plus the beneficiaries also suffer an income tax charge on the balance when the pension is withdrawn, which effectively creates a double tax charge.

If the funds are withdrawn and then gifted, they can still avoid IHT despite their being an income tax charge. For instance, the gift could take place more than seven years before death (and so would not form part of the estate), the amount could fall within an individual’s £3,000 annual exemption or the gift could be deemed to be a gift out of regular income (this would need careful planning).

This is just a snapshot of how the expected changes will impact those with unused pensions in their estate. If you wish to know more on this matter and how it will impact your circumstances, then please feel free to get in touch.