| Larger pension pots could push estates above IHT thresholds | Existing estate planning strategies may need reviewing | The impact will depend on your assets, family circumstances and retirement plans |
Currently, estates worth up to £325,000 will not attract IHT, but if you own your own property and have a substantial pension pot, it’s possible that this could push the value of your estate above the IHT threshold.
If you are married and leave your estate to your spouse or civil partner, they will not have to pay IHT on it when you die. What’s known as your nil-rate band – a £325,000 allowance – is passed onto your spouse when you die. Plus, when they then pass away, any children or grandchildren can inherit up to £650,000 (2 x £325,000) before paying any IHT.
There is another allowance known as the residence nil-rate band. This relates to any property or proceeds from a property sale, which are passed onto direct descendants (children, stepchildren and grandchildren). That’s up to an extra £175,000 that they can inherit before having to pay IHT.
When added to the existing threshold of £325,000 this could potentially give rise to an overall allowance of £500,000 for those who are single or divorced, or £1m for those who are married or in civil partnerships.
It’s important to be aware that larger estates will find that residence relief is tapered; it will reduce by £1 for every £2 of value for estates valued over £2m.
So, who could be affected by the changes to the IHT treatment of pensions?
- Individuals with large pension pots
If you have a substantial pension, your beneficiaries could be affected by upcoming changes to the IHT regime. Under current rules, pension pots are generally outside your estate for IHT purposes. However, from April 2027, most unused pension funds and death benefits may be included in your estate.
The tax treatment also depends on your age at death. If you die before age 75, your beneficiaries can usually access your pension tax-free. If you die after 75, any withdrawals are typically subject to Income Tax at their marginal rate.
For example, Jennifer is a widow and owns a property worth £250,000 and has an ISA (Individual savings Account) worth £100,000. She also has a pension fund worth £200,000. Under current IHT rules, the pension fund does not form part of her estate and would not be included in her estate for IHT. Her estate would have been valued at £350,000 for IHT purposes. However, from 6 April 2027, it could now mean that her total estate is valued at £550,000 for IHT purposes – £225,000 over the IHT threshold of £325,000. Based on current rules which are subject to change.
- Those using pensions as part of estate planning
If you had previously intended to use pensions as a tool in your estate planning or to pass on wealth, now may be the time to reassess this strategy. Possible options that some individuals consider include reducing reliance on them and purchasing an annuity or switching fund choices to provide income rather than growth. However, it will all depend on your individual circumstances. We can help you make the right decisions for you and your family. These options will not be suitable for everyone.
For example, Peter, 75, has £50,000 in savings and decided to put it into his pension to prevent his son from having to pay IHT on it. This is because funds in Peter’s savings accounts could form part of his estate and attract IHT. Under the current rules, pension funds are not included as part of the estate for IHT purposes. However, with the changes to the IHT regime due next April, Peter will need to speak with his financial adviser about other possible suitable options, such as purchasing an annuity or gifting strategies. Based on current rules which are subject to change.
Gifting and trust strategies can have tax implications and may not be suitable for everyone. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. The Financial Conduct Authority does not regulate Will writing, tax and trust advice and certain forms of estate planning