From April 2027, pensions will be brought within the scope of Inheritance Tax, a fundamental change with far-reaching implications for estate planning.
Big pensions = big problems (unless you plan ahead). From April 2027, pensions are “fair game” as far as HMRC are concerned.
𝐏𝐞𝐧𝐬𝐢𝐨𝐧𝐬 𝐚𝐧𝐝 𝐈𝐇𝐓 – 𝐜𝐡𝐚𝐧𝐠𝐞𝐬
Pensions are due to be brought into people’s estate for Inheritance Tax purposes from April 2027.
This will change the current position (that, generally speaking pensions do not form part of the estate for IHT).
The impact of this is profound. A large number of people will suddenly find that their estates are significantly above the IHT allowances once their pensions are added to other taxable assets.
𝐒𝐨𝐥𝐮𝐭𝐢𝐨𝐧𝐬 𝐭𝐨 𝐦𝐢𝐭𝐢𝐠𝐚𝐭𝐞 𝐈𝐇𝐓
One of the most effective ways to reduce an estate for IHT purposes is to make lifetime gifts. However, for most lifetime gifts, the donor (the person making the gift) must survive 7 years from the date of the gift (for the value to fall outside of their estate for IHT purposes).
If the donor died before the 7 years pass then (subject to any reduction via taper relief after 3 years), the gift will be subject to IHT.
An alternative option (that removes the entire value of the gifts from the estate immediately), would be for the donor to make gifts out of surplus income utilising the exemption under IHTA84/S21.
𝘏𝘰𝘸 𝘥𝘰𝘦𝘴 𝘵𝘩𝘪𝘴 𝘸𝘰𝘳𝘬 𝘱𝘳𝘢𝘤𝘵𝘪𝘤𝘢𝘭𝘭𝘺?
To qualify, the gifts must:
– Be part of the donor’s 𝐧𝐨𝐫𝐦𝐚𝐥 𝐞𝐱𝐩𝐞𝐧𝐝𝐢𝐭𝐮𝐫𝐞 (HMRC will consider frequency and amounts, nature of the gifts, identity of the donees and the reasons for the gift)
– Be made 𝐨𝐮𝐭 𝐨𝐟 𝐢𝐧𝐜𝐨𝐦𝐞 (common sources of income are employment and self-employment, rents from property, pensions, interest and dividends)
– Leave the donor with enough income for them to 𝐦𝐚𝐢𝐧𝐭𝐚𝐢𝐧 𝐭𝐡𝐞𝐢𝐫 𝐧𝐨𝐫𝐦𝐚𝐥 𝐬𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐨𝐟 𝐥𝐢𝐯𝐢𝐧𝐠 and must 𝐧𝐨𝐭 𝐛𝐞 𝐨𝐮𝐭 𝐨𝐟 𝐜𝐚𝐩𝐢𝐭𝐚𝐥
𝘖𝘶𝘵𝘤𝘰𝘮𝘦
The potential benefits would be:
1. Donor reduces their estate for IHT purposes
2. No need to survive 7 years from the dates of the gift
3. Drip feed wealth to next gen (rather than one off lump sum)
By drawing larger sums from pensions, people need to be mindful of any potential increased income tax liability. Not only as they will possibly pay a greater rate of income tax (depending on total income) but also because the income tax will definitely be payable (whereas IHT rules may change to be less punitive again in the future).
As a solicitor, I cannot give financial advice. However, at Vault Private Client we work with individuals and their families, together with trusted accountants and financial advisors to provide wealth planning solutions to help them realise their ambitions.
Your pension. Your plan. Your legacy. Let Vault Private Client help you protect it.
