While there were a few pensions changes announced in the Chancellor’s autumn budget (for example, in relation to transfers to qualifying overseas pension schemes), one of the biggest headlines was the announcement that from April 2027, assets remaining in pension schemes on a person’s death will be subject to inheritance tax.

Commentary and interviews since the budget have shown that pension scheme members have concerns about the loss of what was previously a tax-efficient way to pass on wealth.

Although it is undeniable that those who will be affected by the change are likely to be heavily impacted due to the imposition of an inheritance tax charge as well as the existing income tax regime, we anticipate that most people will be unlikely to be caught by the change. The main reason is because of existing inheritance tax exemptions. Any assets which pass to a spouse or civil partner are currently exempt from inheritance tax. Consultation documents from the government state that this will continue and will include any pension benefits which are transferred to a spouse or civil partner.

Members also benefit from the inheritance tax nil-rate band. The effect of this means that the first £325,000 (or £500,000 including a qualifying residence) of a person’s estate will not be subject to any inheritance tax. If assets are left to a spouse or civil partner, then the nil rate band will transfer to them (as they are already exempt from inheritance tax). This could mean that after the death of a person and their spouse, the combined estates (including the value of assets remaining in pension funds) would have to be valued at an amount of at least £1,000,000 before inheritance tax is payable.

For others, the proposal might not be a change. If death benefits from a pension scheme are not discretionary, then those benefits are already subject to inheritance tax. For example, lump sum death benefits from one of the biggest pension schemes in the UK, the NHS Pension Scheme, are already subject to inheritance tax (if paid to someone other than a spouse or civil partner).

For members of defined benefit pension schemes, a dependant may receive a lump sum death benefit and/or a dependant’s pension from the scheme. The government’s consultation document states that a dependant’s pension from a scheme will not be subject to inheritance tax. Other death benefits (such as a dependant’s annuity or pension from drawdown) will be included in the calculation of inheritance tax.

Another point to note is that the changes are not due to be brought in until April 2027 and the government has announced a consultation on how this will be administered. Pension scheme administrators and trustees have an opportunity to respond to this until 22 January 2025.

Pension scheme members will need to consider whether this change will impact them and take advice as required on inheritance tax planning. Inevitably, certain individuals will be significantly impacted by this change, however our expectation is that fewer pension scheme members will be impacted than the headlines suggest.

To learn more about the recent changes to inheritance tax announced in the autumn budget, read our latest blog here. Get in touch to discuss your options and ensure your plans are aligned with the latest updates.

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