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In the lengthy 2024 Autumn Budget, one of the Chancellor’s main announcements was that the Government plans to subject unused pension benefits to Inheritance Tax (IHT) from April 2027.
With two years to go before this legislation is set to come into force, let’s break down what it will actually mean for your estate, plus some ways you might be able to prepare.
Until April 2027, you can pass down unused pension benefits free of Inheritance Tax
You might already be looking at your estate and thinking about ways to mitigate IHT.
One way to do this, at the time of writing, is to leave a portion of your wealth in your pension and pass it down to the next generation when you die. Pension wealth falls outside of your estate for IHT purposes, meaning you could leave a sizeable chunk to your beneficiaries while knowing it will escape the IHT net.
Outside of your pensions, there are also the nil-rate bands, which protect a certain portion of your taxable assets from IHT:
- The nil-rate band lets you pass on assets and cash worth up to £325,000 IHT-free.
- The residence nil-rate band offers an additional £175,000 of relief to those passing down their main home to direct lineal descendants.
So, as an individual, you can currently pass on up to £500,000 before any IHT is due. What’s more, you can inherit your spouse or civil partner’s unused nil-rate bands.
Between you, there’s currently the opportunity to pass £1 million on to the next generation IHT-free, plus any unused pension benefits.
The Chancellor has proposed that pensions be caught in the Inheritance Tax net from April 2027
While the nil-rate bands are frozen until 2030, the Chancellor has proposed that pensions should be included when a person’s estate is valued upon death, meaning funds left within a pension could be liable for IHT from April 2027.
While this legislation is not currently set in stone, if it comes into place as planned, your family’s IHT liability could rise very substantially.
