New Inheritance Tax rules forcing ‘rethinks’
‘Wealthy families’ are fast-tracking lump-sum gifts to adult children and bringing forward planned pension income withdrawals ahead of a major Inheritance tax shake-up next year, according to a report in the Financial Times.
The report comes as new research shows 62 per cent of UK workers with defined contribution pensions are unaware of the April 2027 reforms that will make unspent pension pots liable for IHT.
More than 10,000 additional estates will be subject to the tax after those reforms come into force in 2027-28, according to the government.
Bringing pension pots within the scope of IHT also removes their long-standing role as an estate planning tool.
And the FT report has revealed that advisers and pension providers are seeing a ‘surge’ in access requests from clients with larger-than-average defined contribution pots, as concerns grow over a potential tax hit.
The newspaper quotes one adviser who said: “The new rules have forced many people saving for retirement to rethink their plans and deal with a tax they never expected when they started putting money into their pension.”
From April 6 next year, unused pensions could face a 40 per cent IHT charge if the total estate exceeds the nil-rate band of £325,000.
And that is creating rising interest in the main exemptions that can reduce tax liability.
These include the £3,000 annual gifting allowance, as well as the ‘seven-year rule’, under which no tax is typically due on gifts if you live for seven years after making them.
Another option the FT says is being increasingly explored is making regular payments to another person – for example, to help with living costs – provided these can be sustained after meeting your own usual expenses. These are known as “normal expenditure out of income”.
One wealth manager told the newspaper they believed the coming changes were “likely playing a role” in people accessing their pensions earlier and in larger amounts.
The IHT nil rate band is £325,000, with an additional £175,000 ‘residence nil rate band’ available in some cases for leaving the family home to direct descendants.
For any value remaining after the nil rate bands and IHT reliefs and exemptions, the maximum rate of IHT remains at 40 per cent. The residence nil rate band will remain frozen at £175,000 until 2031.
A survey of 2,000 employees with defined contribution pensions has shown that more than six in ten were unaware that their pension savings could be subject to IHT from April 2027.
It also found that concern about pension visibility was particularly evident among those approaching retirement.
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