In the 2024 Budget, it was announced that pensions will form part of a deceased person’s estate for inheritance tax purposes from 6 April 2027.
Current Pensions and Inheritance Tax
Currently, pensions can pass outside of a deceased person’s estate by way of a nomination or an expression of wishes. This means that they do not fall into the estate and so are excluded from the calculation of inheritance tax (unless a lump sum ends up being paid into the estate).
Pension pots have therefore been a useful estate planning tool, as it’s been possible to build up a pension pot and nominate it to beneficiaries without the worry of it forming part of the estate for tax purposes. However, this is all set to change.
New Pensions and Inheritance Tax
From 6 April 2027, the personal representatives of a deceased’s estate will need to liaise with the pension scheme administrators as to the value of the pension pot and share information with them as to the value of the rest of the estate. They’ll also need to share the available inheritance tax allowances, so that the appropriate amount of tax due on the pension can be paid to HMRC by the pension scheme administrators.
The inclusion of pensions in a deceased’s estate will likely cause more estates to become liable for inheritance tax. This will be worsened by the fact that as the value of an estate grows, the inheritance tax allowances will not, as these have been frozen until at least 2030. The inheritance tax allowances are made up of the Nil Rate Band which is worth up to £325,000 depending on any gifting that you may have done in your lifetime, and the Residence Nil Rate Band, which is worth up to £175,000, depending on the value of your property. Any unused allowances are transferrable between spouses and civil partners.
However, the Residence Nil Rate Band is tapered for estates over £2m to the point that it will then be unavailable to estate that exceed this taper threshold. As a result, more of the estate will be subject to tax.
What this means for you
Whilst the payment of more tax is good news for the Government, it will be a cause of concern for many individuals with substantial savings and pension pots.
It will be more important than ever to ensure that you work in conjunction with your solicitor and financial advisor to review your Will, pension nominations and your general financial position to ensure that the appropriate steps are taken to prepare your estate for these changes and to mitigate any inheritance tax that might become due.
Next Steps...
If you would like to review your Will, please do not hesitate to contact me on 01283 214231 or email c.day@timms-law.com
For more information about Wills, visit our webpage here.
