Affluent British families are accelerating efforts to withdraw pension savings and transfer significant sums to their adult children, fearing an HMRC inheritance tax grab. This comes ahead of major inheritance tax changes due in April next year.
Inheritance Tax Reforms
The reforms, set to take effect from April 2027, will bring most unused pension wealth within the scope of inheritance tax for the first time. From April 6, pension savings left unused at death could be subject to a 40 per cent inheritance tax charge where the total estate exceeds the £325,000 nil-rate threshold.
Labour Party government estimates suggest an additional 10,500 estates will become liable for inheritance tax as a result of the changes, while 38,500 estates are expected to pay more, with average increases of £34,000 compared with current rules.
Expert Opinions
Rachel Vahey, head of public policy at AJ Bell, said: "There's now less than a year left before any unused pension savings could be included as part of pension savers' estates for inheritance tax (IHT) purposes." She added: "The new rules have forced many people saving for retirement to rethink their plans and deal with a tax they never expected when they started putting money into their pension."
Jason Hollands, managing director at wealth manager Evelyn Partners, said: "The inheritance tax overhaul is likely playing a role in clients drawing down their pensions sooner and in greater amounts."
Clare Moffat, pensions and tax expert at Royal London, said: "We have received a lot of questions from financial advisers about clients who want to gift large amounts to children for house purchases, for example, and that could often come from tax free cash."
Sean McCann, chartered financial planner at NFU Mutual, said: "Gifts out of normal expenditure are one of the most valuable but least well-known inheritance tax exemptions, allowing those with surplus income to pass on wealth through regular gifting."
Elsa Littlewood, private wealth partner at BDO, said: "Where someone accesses their pension through flexible drawdown over a relatively short period, I can see a situation where HMRC might challenge a claim for gifts out of income."
Christine Ross, head of private office, north, at Handelsbanken, said: "Clients should ensure gifts are properly documented and made at consistent intervals and amounts to meet the requirements."
