Inheritance Tax to Hit Pensions from April 2027

Strategic Insights -

Pension inheritors will soon face significant changes with the introduction of inheritance tax from April 2027, confirmed by the government. This means that those receiving inherited pensions will be responsible for reporting and paying the tax due, impacting thousands of estates. Families dealing with the loss of a loved one will also face additional bureaucracy, with HMRC estimating that about 10,500 estates will have to pay inheritance tax in 2029/30, while 38,500 will face a larger bill.

Key Takeaways:

  • From April 2027, inherited pensions will be subject to Inheritance Tax and included in the "estate" of someone who has died.
  • The person receiving the inherited pension will be responsible for reporting and paying any Inheritance Tax due, as opposed to it being the responsibility of the pension provider.
  • Death in service payments will not become liable for Inheritance Tax.
  • About 10,500 estates in 2027/28 will have to pay Inheritance Tax in the 2029/30 financial year, while 38,500 will face a larger bill.
  • Families dealing with the loss of a loved one will need to track down all of the pensions held by the deceased to determine tax liability.
  • Complications may arise where family members cannot track down all of the deceased's pensions or where providers are slow to supply information needed to work out the IHT bill.
  • Inheritance Tax is paid on the "estate" of someone that has died, including property, possessions, and money, with the standard rate being 40% above the threshold of £325,000.
  • The Inheritance Tax threshold can increase to £500,000 for estates left to children or grandchildren.

Statistics:

  • 10,500 estates in 2027/28 will have to pay Inheritance Tax in 2029/30.
  • 38,500 estates in 2027/28 will face a larger Inheritance Tax bill.
  • The standard Inheritance Tax rate is 40% above the threshold of £325,000.
  • The Inheritance Tax threshold can increase to £500,000 for estates left to children or grandchildren.

Sources:

  • HMRC estimates that about 10,500 estates in 2027/28 will have to pay Inheritance Tax in 2029/30, while 38,500 will face a larger bill.
  • The government published draft legislation outlining the changes to Inheritance Tax rules.
  • Steve Webb, partner at pension consultants LCP, commented on the impact of the changes on families dealing with the loss of a loved one.
  • Information on Inheritance Tax rates and thresholds from the UK government's website.