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Pensions

Government's Pension Raid to Hit Tens of Thousands of Families with Inheritance Tax

Strategic Insights

— 1 min read

The government's plan to include pension pots in inheritance tax has sparked fierce opposition from the industry, with warnings of an administrative nightmare for grieving relatives. From April 2027, pension pots will be included in the value of an estate for inheritance tax purposes, leading to concerns that tens of thousands of families will face paying the tax.

Key Takeaways:

  • The new rules will double the number of estates paying inheritance tax, from 5% to 10% by 2030, according to the Office for Budget Responsibility.
  • The amount paid in inheritance tax is expected to boom from £8.4 billion by the end of this tax year to an unknown amount due to the changes to pensions.
  • "Personal representatives" will be responsible for dealing with HM Revenue & Customs (HMRC) and paying any inheritance tax due on pensions, which could lead to delays and costs.
  • Beneficiaries of estates could pay effective tax rates of up to 90% due to the double tax hit on inherited pension money.
  • The use of complex, costly financial planning tools is expected to surge to help grieving families navigate the new rules.
  • Campaigners have pressed the government to extend the deadline for paying tax on pensions to 12 or 24 months due to the added complexity.
  • Rachel Vahey from the investment firm AJ Bell warned that families may end up paying for help due to the complexity of the process.

Statistics:

  • The first £325,000 of an estate is inheritance tax-free, with anything above taxed at a rate of 40%.
  • The threshold rises to £500,000 if you leave your main home to a child or grandchild and your estate is worth less than £2 million.
  • Anything left to a spouse or civil partner, including pensions from 2027, is exempt from inheritance tax.
  • Couples have a total of £1 million to pass on inheritance tax-free, shared between them.
  • Pension firms could withhold up to 40% of a pension's value until they are certain that no tax is owed.

Sources:

  • Andrew Tully, Nucleus, October (no specific date mentioned)
  • The investment firm AJ Bell
  • The Office for Budget Responsibility (no specific date mentioned)
  • HM Revenue & Customs (no specific date mentioned)
  • "The Budget", October (no specific date mentioned),
  • The investment firm Nucleus

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