Unused pensions to become subject to Inheritance Tax

Pensions have long been used in succession and Inheritance Tax planning. However, from April 2027, unused pensions will be subject to Inheritance Tax. In this article, we discuss the current position, the changes introduced by the 2024 Budget and the impact on estates from April 2027.
Unused pensions – the current position
Pension funds are currently exempt from Inheritance Tax.
This is because they are not included as an asset in the deceased's estate.
Trustees hold pension funds on behalf of the individual. The trustees can be
instructed to pay the fund to a nominee, or beneficiary, if it has not been
converted into an annuity by the pension owner.
When you carry out succession planning, the aim is to pass
on as much of your wealth as possible to your loved ones. Pensions have long
been a vehicle to achieve this.
Currently, if you die under the age of seventy-five with an
unused pension fund, the entire pension pot can be transferred to a beneficiary
completely free of tax. If you are over seventy-five when you die, the
beneficiary will need to pay Income Tax on the value, at their current tax rate
at that time.
It is for this reason that those who are likely to face an
Inheritance Tax charge on their overall estate, and who can afford to live off
other assets and income, might use their unused pension fund to benefit their
loved ones. They deplete their other assets by using them for their living
expenses and use the pension fund for inheritance purposes.
Changes from April 2027
However, from April 2027, unused pension funds will be
included in an estate for Inheritance Tax purposes. It is proposed that pension
scheme administrators will become liable for reporting and paying any
Inheritance Tax due to HMRC when notified of the pension holder’s death.
In addition, should the pension fund holder be over seventy-five
years of age, not only will Income Tax based on the beneficiary’s Income Tax
rate at that time be payable on the fund, but also Inheritance Tax.
What does this mean for estate planning in the future?
The closure of this avenue of Inheritance Tax avoidance is
impactful for those who were planning to leave their unused tax-free pension
fund to their beneficiaries. Of course, there remains no Inheritance Tax
between spouses or civil partners. On the other hand, transferring your entire
estate to your spouse or civil partner might store up future Inheritance Tax
problems for them.
Some believe that the
new rules will encourage people to draw down their pension funds, either
through income drawdown or annuities, while transferring other assets to their
beneficiaries using available exemptions and gift allowances.
Succession and Estate Planning Solicitors, North Berwick and Dunbar, East Lothian
Succession and estate planning can be immensely
complicated. We recommend that you take professional legal and financial advice
to help decide the most effective benefits to you and your loved ones.
The solicitors at
Paris Steele have a wealth of experience helping clients with their succession
and estate planning challenges. If you would like to discuss how we can help,
or if you wish to make or update your Will, please get in touch with us.
