Are your inheritance plans ready for the tax changes?

Next year will bring significant changes to the tax treatment of pensions.

From April 2027, most unused pension funds and pension death benefits will count for inheritance tax purposes. This means families that may have planned to pass money down through their generations through pension pots will find these assets are caught by inheritance tax – something they will have been keen to avoid. This marks a significant shift from the current position, and we’re advising clients to thoroughly review and amend their future planning in readiness.

Why is the government making this change?

The government has said it’s to ‘remove distortions’ which have led to people using pension schemes as a tax planning vehicle to transfer wealth, rather than to fund retirement. (The current position is that people can build up unlimited tax-free savings in their pension and leave any unused amount to beneficiaries without inheritance tax applying.)

The change is also intended to ‘remove inconsistencies’ in the way in which different types of pensions are treated for inheritance tax purposes.

When do the changes come into force?

The new regime will apply from 6 April 2027. This means that if a person dies before 6 April, the current rules apply. That is the case even if the payments from the pension are not due to be made until after that date.

Are there any exclusions?

Yes. Payments to charities and to long-term UK-resident spouses and civil partners, for example, do not attract inheritance tax.

 There are also some excluded benefits:

- Dependants’ scheme pension

This is an authorised death benefit paid to a dependant after the death of a pension scheme member. ‘Dependant’ includes: a child and a surviving husband, wife or civil partner. It might also include others who were financially dependent on the person who died.

- Trivial commutation

This is the release of a one-off lump sum rather than a series of smaller payments. It counts as an excluded benefit where it draws a line under the beneficiary’s entitlement to a dependants’ scheme pension.

- Joint life annuities

These are excluded if the annuity was bought alongside, and is related to, a member’s lifetime annuity.

- Death in service benefits

These are amounts payable as a benefit to a scheme member if they were employed (or in work of ‘a particular description’) immediately before their death.

What difference will the changes actually make?

The switch in inheritance tax focus will force families to rethink their financial planning. That’s if they want to minimise the estate’s inheritance tax liability. While many will have spent years ploughing money into and ringfencing their pension funds, it’s now time to look at different ways of structuring finances and using or offloading assets.

What action should people be taking?

Many people have begun to gift money in anticipation of the changes. There are strict rules on this however, and so it’s vital to seek professional advice before taking action. Talking to trusted legal and financial advisors will mean you’ll get personalised advice on protecting the value in your assets. This will likely involve a review of your will, your pension, and your financial plans. It’s professional support that will help ensure you’re ready for the changes.

Contact our team now on info@bsandi.co.uk or call us on 01264 353411.