New Inheritance Tax Rules: Pensions to Be Included from April 2027

Overview of the Changes

In a move that has sparked widespread opposition, the government has announced that pensions will be subject to inheritance tax (IHT) beginning in April 2027. This new policy will incorporate pension values into the overall estate for tax calculations, a shift that the Treasury estimates will generate approximately £1.46 billion annually by the financial year 2029-30.

Key Details of the Inheritance Tax Reform

Starting in April 2027, it is projected that around 10,500 estates will be liable for IHT in the first year following the implementation, with 38,500 estates anticipated to contend with increased tax bills. This change has been termed the Labour government’s most unpopular tax alteration so far. According to a survey conducted by AJ Bell involving 2,050 adults, 44% expressed opposition to imposing IHT on pensions, while only 21% showed support.

Industry Reaction

Renny Biggins, representing the Investing and Savings Alliance—a consortium of over 270 financial services firms—has voiced disappointment over the decision, emphasizing the industry’s resistance to making pensions part of IHT calculations.

Reporting Responsibilities Post-Change

Initially, the government proposed that pension schemes would be responsible for calculating and paying any inheritance tax due on pension pots. However, following feedback from the pensions industry, the responsibility will now fall on personal representatives, typically solicitors or family members. They must report and settle any IHT related to pensions within six months of the date of death to prevent incurring interest on overdue payments.

Implications for Bereaved Families

Sir Steve Webb, a former pensions minister, highlighted the added burden this change may impose on grieving families. He emphasized the complexities of tracking down all pensions held by the deceased and contacting schemes for necessary information amidst an already difficult time. Webb suggested that the government should reevaluate the penalties associated with late payment of IHT bills to avoid additional stress for families caused by delays.

Closing the Loophole

The decision to include pensions in IHT calculations aims to mitigate a loophole that provided a unique tax-efficient route for wealth transfer. Wealthy individuals could previously leverage pensions while utilizing other assets during retirement, effectively allowing their pension savings to bypass IHT altogether.

Existing Tax-Free Provisions

Beneficiaries can still inherit up to £325,000 of assets without triggering IHT; this threshold rises to £500,000 if the main residence is passed to direct descendants, provided the estate is valued under £2 million. Importantly, any inheritance passed to a spouse or civil partner remains IHT-free, including pensions from 2027 onwards.

Exceptions: Death-In-Service Benefits

In a positive note for families, death-in-service benefits from pension schemes will remain exempt from IHT. Pete Maddern from Canada Life stressed the importance of these benefits, offering crucial financial support to families after the loss of a working-age income earner. Including such benefits in tax changes could have detrimental effects on grieving families and their employers.

Conclusion

The inclusion of pensions in inheritance tax calculations represents a significant policy shift that will impact numerous families in the coming years. While it aims to address tax inefficiencies, it also introduces new complexities for those managing the estates of loved ones. As the implementation date approaches, families and professionals alike will need to prepare for these challenges.

For more information on inheritance tax and financial advice, consult our expert resources.