Pension Changes

One of the proposed changes from the recent October 2024 Budget is to bring pension pots within the Inheritance Tax (IHT) Net.  This will potentially have big implications for IHT and pension planning.

Current position

Currently the pension pot falls outside of a person’s estate for IHT purposes.  This means that it can be passed to beneficiaries without IHT being charged. If death occurs before age 75 then no tax applies, and if after age 75 then the beneficiary pays Income Tax at their own marginal rate.

Proposed position

The Government have announced that From April 2027 the pension pot is brought within the death Estate and charged to IHT on death.  This leads to the potential for double taxation.

Double taxation

After April 2027, the value of the pension pot is subject to 40% IHT on death.  If death were to occur after age 75 the beneficiary would be subject to income tax at their marginal rate, after the IHT has been suffered.

For example, with a pension pot of £1,000, this would be subject to 40% IHT, leaving £600. This money would then be subject to the beneficiary’s rate of Income Tax. In the worst case this would be 45%, resulting in just £333 being received by the beneficiary - an effective tax rate of 67%.

It’s important to note that the rules have not yet been finalised and revisions could happen before they come into force. 

With these proposed changes due to come into effect from April 2027 there is time to get your affairs into order before they tax effect.

Get in touch and we can review your inheritance tax position, including how these new rules will apply to your position.