HM Revenue and Customs (HMRC) has confirmed the final details regarding the treatment of pensions under the revised inheritance tax (IHT) rules, which will come into force from April 2027. Notably, from April next year, unused pension pots will be subject to inheritance tax, marking a significant change in how these assets are treated within estates.
These changes were initially introduced by former Chancellor Rachel Reeves and are now set to be implemented by the new Chancellor John Healey, who assumed office following Reeves’ departure when Andy Burnham became leader of the Labour Party.
Nick Henshaw, Head of Intermediaries Distribution at Wesleyan, explained the implications: “HMRC has now clarified specific aspects of these changes. Currently, pension assets do not benefit from the same reliefs afforded to other estate assets, which may introduce additional complexity for families and those administering estates.”
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He further highlighted a potential issue for beneficiaries: “There is a risk that pension pots might be identified only after an estate has been settled. In such cases, the inheritance tax assessment for the entire estate could need to be revisited, potentially leading to beneficiaries facing unexpected tax bills years after receiving their inheritance.”
Shaun Moore, a tax and financial planning expert at Quilter, provided broader context, stating, “PAYE income tax and National Insurance contributions from April to July amounted to £173.2 billion, which is £12.5 billion higher than the same period last year.”
“This approach is an effective method for the Treasury to increase revenues without introducing headline tax rises,” Moore added, “but for taxpayers, it often means paying more tax without a noticeable improvement in their financial situation.”
Looking ahead, Moore noted that with the budget approaching, wealth taxes are likely to receive increased scrutiny as the government explores options for fiscal balance.
He advised individuals to take proactive measures: “Given that pensions will become subject to inheritance tax from April 2027, it is an opportune moment to review estate planning strategies to ensure they remain suitable.”
Echoing the importance of preparedness, Mr Henshaw recommended, “Maintaining an up-to-date record of all pension arrangements and regularly revisiting estate plans can help families better understand their financial circumstances and diminish the risk of unwelcome surprises in the future.”