In the Autumn Budget 2024, Chancellor Rachel Reeves announced significant changes to the treatment of pensions concerning Inheritance Tax (IHT). Starting from 6 April 2027, most unused pension funds and death benefits will be included in the value of an individual’s estate for IHT purposes.

This marks a departure from the current framework, where unused pension funds are typically exempt from IHT, allowing them to be passed to beneficiaries without incurring this tax. The forthcoming changes mean that, unless addressed, your pension assets could be subject to the standard 40% IHT rate on the value exceeding the nil-rate band, currently set at £325,000.

It’s prudent to use the next two years to prepare and adjust your financial and estate planning strategies accordingly. Here are key steps to consider:

Review Your Pension Arrangements

Assess the current value of your pension funds and project their growth up to and beyond 2027. Understanding the potential size of your pension estate will help in determining the possible IHT exposure.

Consider Lifetime Gifts

Making gifts during your lifetime can reduce the value of your estate subject to IHT. Utilising allowances such as the annual exemption (£3,000 per year) and the small gifts exemption (£250 per person) can be effective. Remember, gifts may be exempt from IHT if you survive for seven years after making them.

Explore Pension Drawdown Strategies

Drawing down from your pension to fund other IHT-efficient investments or to make lifetime gifts could be beneficial. However, this must be balanced against your income needs and potential tax implications.

Evaluate Alternative Investment Options

For those looking to mitigate Inheritance Tax (IHT), certain investment and protection strategies can be considered. Enterprise Investment Schemes (EIS) and Business Relief (BR)-qualifying assets may provide IHT relief after a holding period, typically two years, making them a potential option for long-term estate planning. However, it is important to note that these are high-risk investments, meaning their value can fluctuate, and investors must be prepared for the possibility of losing all capital invested.

For those seeking a more predictable approach, whole-of-life insurance policies can provide an alternative way to cover IHT liabilities. These policies, when written in trust, ensure that beneficiaries receive a tax-free payout that can help settle IHT obligations, providing certainty in estate planning.

Update Your Will and Nomination Forms

Ensure your will reflects your current wishes and that your pension nomination forms are up to date. Clear instructions can help in the efficient distribution of your estate and may mitigate potential IHT liabilities.

Consult

Given the complexity of the potential changes to Inheritance Tax (IHT) on pensions, staying informed is essential. The Government’s technical consultation closed on 22 January 2025, and further details are expected in due course. As final decisions are yet to be confirmed, keeping an eye on updates will be key. In the meantime, seeking professional financial advice can help you explore personalised estate planning strategies and ensure you’re prepared for any forthcoming changes.

By proactively addressing these changes, you can better position your estate to minimise potential IHT liabilities and ensure your beneficiaries receive the maximum benefit from your legacy.

More information on these proposed changes can be found here.

If you would like to discuss anything mentioned in this article, please contact us.

See the other topics in our Bitesize Tax Planning series:
Personal Reliefs
Planning for Retirement
Savings & Investments
Employee Benefits
All Matters Financial Podcast

Dive deeper into the topics mentioned on this insight and more with our All Matters Finance Podcast. Click the link below:

Download our Tax Planning Health Check Below:
This field is hidden when viewing the form
This is used only for conditional logic to redirect users to the correct content and is not displayed on the frontend.
This field is hidden when viewing the form
This is used to identify the amount of times a resource has been downloaded and from what page. This isn't visible on the frontend.
First Name(Required)
Last Name(Required)
Consent

Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.

The Financial Conduct Authority (FCA) does not regulate tax advice, estate planning, trusts or will writing.

The content in this article is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice.

Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.

Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.

Pareto Financial Planning Limited is authorised and regulated by the Financial Conduct Authority (FCA).