Inheritance Tax Changes looming on Pension Pots

Currently, pension pots are not usually included in the value of your estate for inheritance tax purposes. Subject to a few exceptions, if a pension pot has been written into trust so that the scheme administrator or trustees have discretion over to whom death benefits are paid it is usually exempt from inheritance tax.

However, from 6 April 2027, the position is changing, and unspent pension funds and death benefits will be included within the value of your estate for inheritance tax purposes, regardless of whether or not there is discretion over the payment of the benefits. Exemptions will still apply where funds are passing to a spouse or civil partner, but analysis from HMRC estimates that the new provisions will mean that an extra 10,500 estates will have to pay inheritance tax in the 2027-28 financial year.

As things stand, if you die before the age of 75, defined contribution pensions can usually pass tax free to a nominated beneficiary, up to a certain threshold. However, if you are over 75 when you die, your beneficiaries will normally pay income tax on money they withdraw from your pension. These rules will remain in place, meaning that if you die over the age of 75, when your pension is brought into the scope of inheritance tax, your beneficiaries could essentially face paying both income tax and inheritance tax on the money they receive.

If you have concerns regarding the inheritance tax position for your estate and would like to discuss general ways in which this could be mitigated, please get in touch with us to review your options on 01892 662233 or reception@dwlaw-online.com. 

Written by Elizabeth Shepperd - Solicitor