The Society of Trust and Estate Practitioners (STEP) has warned that pension reforms coming into force from April 2027 could add thousands of pounds to families' inheritance tax (IHT) bills and unintentionally prevent them from claiming a reduced rate of tax.
From April 2027, pensions become liable for inheritance tax, a change that will be overseen by Andy Burnham and his Chancellor John Healey. STEP says the shake-up could mean that charitable donations left in a will no longer make up 10 per cent of an estate, a threshold required to qualify for the lower 36 per cent IHT rate instead of the standard 40 per cent.
Charitable donation threshold at risk
Under current rules, if a person leaves at least 10 per cent of their net estate to charity in their will, the inheritance tax rate on the rest of the estate is reduced from 40 per cent to 36 per cent. From April 2027, when pensions are included in the inheritance tax calculation, the value of an estate will rise, meaning the 10 per cent threshold becomes harder to meet.
Alex Shields, of the financial advice firm The Private Office, said: “If someone’s set up the donation in their will with numerical amounts with the intention of getting the 36pc rate, they will find from 2027 that the amount they need in order to benefit from the rate has gone up, and they might need to look at their will again.”
Estate values could shift overnight
Mr Shields also warned that the overall distribution of assets after tax could change significantly when the new rules take effect. He said: “The split of assets after tax could change significantly overnight due to the pension changes in 2027.”
For individuals over the age of 75, pensions are potentially subject to a very high marginal tax rate under the new regime, which could make charitable giving directly from the pension more attractive, according to Mr Shields.
STEP urges government review
STEP has written to HM Treasury and Labour Party minister James Murray to raise its concerns about the planned changes. Emily Deane, of STEP, said: “The proposed pension changes should not proceed without a thorough assessment of how they will work in practice and their wider impact on the tax system.”
She added: “Unless tax changes are joined up, policies could cost more to administer than they raise in revenue, with families and businesses forced to pay for specialist advice just to understand their liabilities.”
The reforms are part of a broader government policy that will bring pensions into the inheritance tax net for the first time, affecting estates of families who have planned their wills around existing thresholds. Families who have already set up charitable donations in their wills may need to review their arrangements ahead of April 2027 to ensure they still qualify for the reduced rate.
