October’s Budget was one which made all sorts of headlines, but one of the measures which has grabbed people’s attention is the announcement that pensions will fall into an estate and be subjected to inheritance tax from 2027.
On the face of it, this will now mean that all pension funds will be added to an individual’s estate on death, effectively resulting in a 40% tax on the fund. Understandably, many people are already expressing concern.
It is easy to fall into a panic when an announcement like this is made, but actually, this is a time for level-headedness.
The legislation will not come into effect until April 2027, two and half years away. If anything was to happen to an individual before then, the fund can still be passed on tax-free to beneficiaries.
The reason for the delay until 2027 is that there will be a consultation period to determine exactly how the measure will be implemented. As ever, the devil will be in the detail. The results of the consultation will come through early in 2025, and we may have a greater understanding of the actual implications then.
It is important that we do not undertake any knee-jerk reactions until we know exactly what the new landscape looks like. With two and a half years until this comes into effect and affects us all, there is plenty of time to help plan accordingly.
We already know that inter-spousal transfers will remain tax-free, as with all estates. Therefore if the expression of wish was to leave the funds to a spouse/civil partner, this will not trigger any form of IHT, and the tax will only be payable on the second death when the fund is passed to other beneficiaries.
Whatever the outcome of the consultation, it is clear that significantly more of us will fall into the IHT regime from April 2027, and wider wealth planning and effective inheritance tax planning will be vitally important over the next few years.
Whilst this is certainly not good news, it must be put into context in respect of the strong tax efficiencies that pension funds already enjoy, and the planning opportunities we can consider implementing for mitigation.
We will of course keep you up to date with these changes as and when we learn more but please feel free to get in touch if you have any questions.