Pensions have for decades sat outside the inheritance tax net, making them a useful and tax-efficient tool to pass on wealth to the next generation. From April 2027 that changes. Unused pension funds will be drawn into the value of an estate for inheritance tax purposes. It is the single biggest change to inheritance tax for a generation, drawing even those with modest pension pots into the IHT net.
In addition to leaving individual estates with greater exposure to IHT, the change brings with it considerable challenges around timing of when IHT must be paid. Inheritance tax has always operated to a tight and rigidly fixed timetable: the tax must be paid by the end of the sixth month after the person died, regardless of how complicated the estate turns out to be.
The deadline was broadly manageable when pensions sat outside of an estate. It will be considerably harder to meet within that six-month window when the rules change.
Pensions are often spread across different providers, built up over a lifetime and changing when an individual moves jobs. They may not always be obvious to executors and even when they are, pensions can be slow to value and release.
Executors will need accurate valuations and the IHT arising within a six-month window, and that is likely to stretch many estates to breaking. Questions have been asked whether pension providers are geared up for the change.
Not just the wealthy
This is not a problem that just effects the very wealthy. Anyone with a reasonable pension pot, along with their home, savings and investments are likely to find themselves facing greater exposure to IHT. The value of a pension fund built up over decades if left unspent during retirement could result in a hefty tax bill.
It raises an important question: are your executors ready for these changes?
Administering an estate has always required patience, organisation and the ability to draw often complex finances together. It will now require a greater understanding of pension assets and their valuation.
These changes need not be alarming, but they do need to be understood. There is still time for individuals to act, reviewing nominations, talking to your executors and seeking advice on whether matters can be simplified or reviewed more holistically
Over the next few months, we will be exploring and explaining these changes in greater detail looking at:
- The impact of inheritance tax on pensions and the steps individuals may wish to consider ahead of the changes.
- The need to review nominations and the implications if you do not
- Explain the probate challenges executors may face when dealing with pensions
- How critical a collaborative approach between advisors will be during lifetime to ensure best planning.
If you have any questions about how these changes will affect your estate, please contact Shelina Vaiya an Associate Solicitor in our Private Client team on svaiya@bishopandsewell.co.uk or +44 (0)20 7079 4138.
