January 14th, 2025
3 important factors to remember about pensions and Inheritance Tax
Since the Autumn Budget, delivered on 30 October 2024 by chancellor Rachel Reeves, you might have heard from clients who are concerned about how these announcements will affect their finances.
From Capital Gains Tax to business relief, there’s so much to take in from this historic Budget. We have previously published a comprehensive overview of how your clients’ wealth might be affected by the Autumn Budget and why financial planning might help.
Taking a closer look, one area of particular concern for many is Inheritance Tax (IHT) and how Budget announcements regarding pensions could increase families’ liabilities after a loved one dies.
Read on to discover three key factors to be aware of regarding pensions and IHT after the Autumn Budget.
1. The chancellor froze the Inheritance Tax nil-rate bands until 2030
As you may be aware, the nil-rate band stands at £325,000, and represents the amount a person can pass down to non-spousal beneficiaries tax-free when they die. The nil-rate band has been frozen at this level since 2009.
In addition, the residence nil-rate band is available to those passing their main home to children, grandchildren, or other “direct descendants” such as adopted or step-children. This stands at £175,000, and has done so since 2020.
Taken together, a person can currently pass down up to £500,000, if this includes their home, without IHT being charged to their estate.
Previously, the Conservatives froze the nil-rate bands until 2028. But in the Autumn Budget, the chancellor extended the freeze to 2030.
Families are already feeling the effects of these freezes. As you can see from the below graph, while IHT receipts fluctuate throughout the year, the 2024/25 tax year has seen HMRC take higher amounts in IHT than in the previous three financial years (on the whole).
Source: HMRC
The same report notes that between April and November 2024, IHT receipts stood at £5.7 billion, up £0.6 billion from the same period in the previous year.
With these upticks in mind, if the value of your clients’ estates rise in the coming years, a greater portion of their wealth could be dragged into the IHT bracket.
These circumstances provide key context for the chancellor’s latest Budget announcement regarding pensions and IHT.
2. Pensions are set to form part of a person’s estate from April 2027
In a historic move, Reeves announced that from April 2027 onwards, pensions are set to form part of a person’s estate for IHT purposes. As it currently stands in the 2024/25 tax year, unused pension benefits can usually be bequeathed untaxed after the pension holder dies.
Your clients’ pensions are likely to be some of the most valuable assets to their name. If your client passes away with a pension pot worth £100,000, for instance, this could push their estate even further over the IHT line, subjecting a greater portion of their wealth to this tax.
Remember: this proposed move is not set in stone just yet. While announced in the Budget, this change to fiscal policy must pass through a technical consultation and several other stages before becoming law. So, much like other recent proposals such as Jeremy Hunt’s British ISA, the inclusion of pensions within the IHT net could yet be thrown out.
However, it’s crucial for your clients to prepare for this possible eventuality, considering how these changes could affect their retirement and estate plans.
3. Your clients may wish to revise their pension decumulation and estate plans
If your clients are pre- or early-retirement, they may be concerned about their pensions being subject to IHT in the future.
While they could have previously planned to remain invested in their pensions for as long as possible to pass wealth down to the next generation untaxed, their strategy could now be called into question. They could be worried that preserving pension wealth may now cause their IHT bill to go up, rather than come down.
As such, some may wish to look more closely at gifting strategies that help them divert assets to the next generation over the course of several years. Or, they could look into placing funds outside of their pension, perhaps in trust, to protect them from IHT where possible and reduce their overall taxable estate.
With so many options to consider, it is important that your clients seek professional advice before making any rash choices as a result of the Budget. Financial planning could help your clients maintain peace of mind and ensure they’re doing everything possible to mitigate IHT where they can.
Get in touch
To speak to us about how we can help your clients, or put your clients in contact with us directly, just email enquiries@prosserknowles.co.uk or call 01905 619 100.
We look forward to hearing from you.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate estate planning, trusts, or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.