With thanks to Sara White, Editor, Business & Accountancy Daily
Inheritance tax will be charged on all unused pension pots from April 2027 with income tax liability for those aged over 75 and a six-month payment deadline
The government will bring unused pension funds into scope of inheritance tax (IHT) from 6 April 2027, but death in service benefits paid by employers will remain outside the IHT regime for now.
This means that an interest in a registered pension, a qualifying non-UK pension scheme, or a section 615(3) scheme will be taken into account in valuing a person’s estate for IHT purposes.
Payment will be required within six months, with no difference to usual IHT deadlines, regardless of the complexity of the new framework.
‘Although most savers will be unaffected and should not need to change their financial plans, some now face difficult choices about how best to arrange their finances.
‘Bereaved families also face a huge administrative burden, with the government insisting they settle the IHT bill within six months.
It is likely to affect nearly 40,000 estates that will pay more tax than previously with an estimated bill of around £34,000.
The chancellor Rachel Reeves took the decision to tax the unused pots to address the perceived use of pensions for beneficial tax planning, first announced at autumn Budget 2024.
The Treasury stated: ‘This change has been introduced to prevent pension schemes from being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for their intended purpose of funding retirement.’
Now draft legislation and an explanatory note on the changes to be introduced through section 150A Inheritance Tax Act 1984 has been published.
Personal representatives, not pension scheme administrators (PSAs), will be liable for reporting and paying any IHT due. They already pay IHT bills on behalf of estates so this is viewed as the best way to administer the system.
Inherited pension wealth may also be subject to income tax, depending on the deceased’s age at death and the type of benefit.
If the individual dies before age 75, death benefits (including lump sums and inherited drawdown pensions) are typically taken free of income tax. If they die on or after age 75, these benefits are usually taxed as income at the recipient’s marginal rate.
‘If the pension beneficiary directs the PSA to pay their inheritance tax liability, these payments will be authorised payments and will not be subject to income tax,’
The existing IHT principles providing exemption for death benefits passing to a surviving spouse or civil partner, and registered charities will be maintained.
The draft legislation closes for comment on 15 September.
Kind regards,
Howard Gross BFP FCA FCCA CTA
Director
