In Rachel Reeves’ first Budget in the autumn, the inheritance tax change that really caught the public’s attention was the plan to reduce Agricultural Property Relief. Farmers have been protesting in London, with images of tractors around Parliament Square hitting the headlines. However, a proposed change to pensions that will affect many people seems to have gone somewhat under the radar.
At present, pension pots are generally outside the deceased’s estate for inheritance tax purposes. The government has proposed that from April 2027, unused pensions and death benefits will be inside the estate for inheritance tax purposes, and the pension scheme administrator will be responsible for reporting and paying the tax on that asset.
It is therefore important to start considering estates and pensions in tandem when carrying out inheritance tax planning. When taking the value of SIPPs into account, more estates may well be valued above £2 million meaning that entitlement to the Residence Nil Rate Band tapers down or falls away entirely. Clients already drawing down their pensions may wish to consider changes such as drawing down larger amounts to spend or use for making gifts (in accordance with HMRC’s rules on gifts) and reviewing their nominations, perhaps including charities as beneficiaries.
From a practical point of view, executors and pension scheme administrators will need to liaise with each other. The deceased may well have a number of pension pots, particularly if they have changed jobs frequently, leading to a greater administrative burden on executors. There will also need to be liquid funds within the pension to fund that part of the tax.
It is important to note that this is currently a proposal which will not come into effect until 6th April 2027 and that clients should consult their independent financial advisers before making changes.
If you're concerned about how the proposed changes to inheritance tax could affect your pension or estate planning, speak to Anne Stockley by email: anne.stockley@salaw.com or call: 01727 798 041.
