Unused pension pots will be brought within the scope of inheritance tax (IHT) from April 2027, a change that could leave beneficiaries facing unexpected tax bills years after an estate has been distributed, according to financial experts.
HM Revenue & Customs (HMRC) has confirmed how pensions will be treated under the new rules, which were originally introduced by former Chancellor Rachel Reeves. The measures are now set to be implemented by new Chancellor John Healey, who replaced Ms Reeves after Andy Burnham became leader of the Labour Party.
Pension assets lose reliefs
Nick Henshaw, Head of Intermediaries Distribution at Wesleyan, said HMRC has clarified some aspects of the changes. Under current plans, pension assets will not benefit from the same reliefs available to other estate assets, potentially adding another layer of complexity for families and those administering estates.
Mr Henshaw also highlighted the risk of pension pots being discovered after an estate has been settled. In those circumstances, the inheritance tax position across the estate may need to be revisited, potentially leaving beneficiaries facing an unexpected bill years after an inheritance has been distributed.
Revenue boost without headline tax rises
Shaun Moore, a tax and financial planning expert at Quilter, noted that PAYE income tax and national insurance contributions for April to July came in at £173.2 billion, which is £12.5 billion more than the same period last year. He said that for the Treasury, this is an effective way of boosting revenues without announcing headline tax rises, but for taxpayers it often means paying more tax without feeling any better off.
With the budget drawing near, wealth taxes are likely to attract increasing attention as the government looks at how best to balance the books, Mr Moore added.
Estate planning advice
With pensions set to become subject to inheritance tax from April 2027, Mr Moore said now is a sensible time to review estate planning arrangements and ensure they remain appropriate.
Mr Henshaw advised keeping an up-to-date record of all pension arrangements and regularly reviewing estate plans, which can make it easier for families to understand what they are dealing with and reduce the risk of unwelcome surprises down the line.
