Pensions and Inheritance Tax
You may have read about the budget on 30th October and one of the biggest announcements which was undoubtedly the proposal to include pensions in estates for Inheritance Tax (IHT) from April 2027. We are writing to you now to urge that you take no action in respect of this for the immediate future for the reasons set out below.
The main reason for this is that the planned changes are for the moment at the proposal stage and may be varied, potentially significantly before they become law. There is currently a consultation which is open until 22nd January 2025 for interested parties to provide their views on the detailed regulations required to implement these changes. Following this consultation, it is expected that the draft legislation will be issued in the second half of 2025 and is expected to come into effect in April 2027.
Therefore, the current legislation will remain in place until April 2027. Thus, there is no need to make any immediate decisions concerning your pension, and we would recommend not making any changes at least until the draft legislation is confirmed later in 2025 as the current rules will remain until April 2027.
It is clear from the wording in the consultation paper that the Government and HMRC want pensions to be used for retirement income rather than as wealth protection plans. “In recent years, pension schemes have been increasingly used and marketed as a tax planning tool to transfer wealth without an Inheritance Tax charge, rather than for their intended purpose of funding retirement.” It should be noted that when the pension rules changed in 2015, known as Pensions Freedoms, this was the first time that this type of financial planning was allowed.
The planned changes would mean that from 6th April 2027 most unused pension funds and death benefits would be included within the value of a person’s estate for Inheritance Tax purposes. In effect, most monies that are in a pension fund at the date of death, would be treated as being part of that person’s estate and may be liable to IHT.
We will of course keep you informed and, once the legislation is drafted, we will be better placed to provide planning advice to you in this regard. However, and to reiterate, at this time we would not recommend taking any action whilst these are still proposals not planned to be implemented until April 2027. Until that time all the current rules are still in place, meaning most pensions are outside of IHT.
If you do have any immediate concerns about the proposed changes, please do not hesitate to contact your adviser, who will be happy to talk these through with you.