Tractors lining Whitehall protesting the changes to Agricultural Property Relief will be the defining image of the Labour Government’s approach to inheritance tax (IHT). Yet another measure, announced at the same time but to fewer column inches and placards, will affect more people and raise far more IHT.
Announced as part of the 2024 budget and taking effect from April 2027, individuals’ unused pension funds will be included in their estate for the purpose of calculating IHT payable following their death.
In making the capital value of unused pensions subject to IHT, the Government will make a huge pool of accumulated capital subject to tax and significantly increase how much IHT is paid, and how many people pay it. It is forecast that this measure will subject an estimated 10,500 estates to IHT which previously would have paid none, and see another 38,500 estates pay, on average, an additional £34,000 of IHT.
Ahead of this far-reaching change to how inheritance tax is charged, individuals should review and reconsider their tax and estate planning.
In this briefing, legal director Edward Harper-Masters discusses how the inclusion of unused pensions in inheritance tax calculations will affect estates and the steps individuals should take to plan ahead.
The current position
Most pension schemes are outside of an individual’s estate, so their value is not included in the IHT calculation following the owner’s death. The succession of any unused pension pot is not governed by the terms of the owner’s Will. Instead, who benefits is at the discretion of the scheme trustees (though they will often be guided by any nomination the scheme member has made).
How the law will change
From April 2027, the value of any unused pension funds will be included in calculating an estate’s liability to IHT. This will not affect who benefits, which will still be decided by the trustees rather than the terms of the Will. Instead, it will increase the IHT payable on a death. Defined benefit (i.e., final salary schemes) will also be included if they provide ongoing benefits.
Certain pension-like payments such as death in service benefits will remain outside the scope of IHT. Equally the spouse, civil partner and charity exemptions will continue to apply meaning a pension left to a qualifying beneficiary will be exempt from IHT.
The role of personal representatives
Personal representatives will be responsible for gathering in information about all the deceased’s pensions. They will also be primarily liable for paying the IHT attributable to pensions.
Once the scheme trustees have made their decision, beneficiaries will be able to request that the scheme administrator pays the IHT attributable to the benefit they are receiving. Given the potential benefits that an ongoing pension might grant, beneficiaries will need to carefully consider their options before deciding how the tax should be paid.
As part of the 2025 Budget, it was announced that personal representatives will also be able to request that a scheme administrator withholds up to 50% of the taxable benefits, but only for a maximum of 15 months.
Planning
The Government continues to consult on its draft legislation but it looks unlikely that it will change substantially. Before these changes come into effect individuals should review their Wills, tax and succession planning:
- Recalculate your potential IHT liability taking into account the value of your pensions
- Consolidate and record pension details so your executors can quickly establish values and report the tax payable
- Coordination between personal representatives, pension scheme administrators and beneficiaries will be important. For this reason, individuals should review their Wills and broader estate planning to ensure that each party understands their role
- Review how your pension operates as part of your wider tax and succession planning to ensure that your wishes as to who benefits from your Will and assets that pass outside the terms of the Will.
Russell-Cooke LLP cannot give financial or investment advice but can assist you and your family with tax and succession planning, including how your pension will impact your potential inheritance tax after April 2027.
About Edward
Edward Harper-Masters is a legal director in the private client team. He advises individuals and families on their wills and estate planning, the administration of estates (probate), creating and administering trusts and, both creating and administering powers of attorney.
Get in touch
If you would like to speak with a member of the team you can contact our private client solicitors; Holborn office +44 (0)20 3826 7522; Kingston office +44 (0)20 3826 7529 or Putney office +44 (0)20 3826 7515 or complete our form.
