Millions of pension savers are facing a potential 'double tax hit' under new inheritance tax rules set to take effect from April 2027. The changes, announced in the 2024 Autumn Budget, will bring unused defined contribution pension pots into the scope of Inheritance Tax (IHT), marking a significant departure from current regulations.
What Is Changing?
Currently, pensions typically sit outside the IHT net and can be passed on tax-efficiently, especially if death occurs before age 75. Under the proposed rules, the unused value of a pension at death will be subject to the standard 40% inheritance tax rate. Beneficiaries may also face Income Tax on withdrawals, creating a potential double taxation scenario.
Henrietta Grimston, Chartered Financial Planner at Saltus, warned: "Administratively, the new requirements will be very difficult to adhere to. Managing multiple pension providers at once, getting the valuation of the unspent pension and working out the proportional share on each of those pensions is a time-consuming process."
Impact on Beneficiaries
In some cases, beneficiaries may have to pay both Inheritance Tax and Income Tax on the same pension wealth. However, safeguards are proposed to prevent full double taxation. Beneficiaries will be able to offset income tax on withdrawals by claiming a deduction for any IHT already paid.
While these reforms remain in draft form, they could have a significant impact on estate planning strategies. Once finalised, individuals are advised to review their approach and seek professional advice.
Strategies to Reduce Inheritance Tax
There are several ways to reduce inheritance tax liability. Common strategies include making gifts during your lifetime (which may become exempt after seven years), leaving assets to a spouse or civil partner (which is exempt), using trusts, and taking advantage of reliefs for business or agricultural property. Given the complexity, working with a financial adviser is recommended.
