Increasing Number of Individuals Paying Inheritance Tax as Forecasts Indicate a Doubling by the End of the Decade
Headline: Inheritance Tax Reforms Set to Affect More Britons as Pension Funds Come Under Taxation
Starting from 6 April 2027, a significant change will be introduced to the UK's Inheritance Tax (IHT) rules, as most unused pension funds and death benefits will be included in the valuation of deceased individuals' estates [1][2][3][5]. This change marks a departure from current rules where such pension assets often pass free of IHT.
Up until now, many unused pension funds could be inherited without an IHT charge, partly because most UK pensions are discretionary schemes outside the estate for IHT calculations. However, reforms introduced in the Autumn Budget 2024 aim to close this gap, treating these funds like other estate assets, potentially increasing IHT liabilities for beneficiaries [2].
Initially, the government proposed that pension scheme administrators (PSAs) would be responsible for reporting and paying the tax. However, after receiving feedback expressing concerns about this approach, the government has decided that personal representatives (PRs) will instead be liable for this from 6 April 2027. Death-in-service benefits, on the other hand, will remain outside the scope of IHT [1][2].
Experts predict that these changes will result in a significant increase in the number of deaths liable for inheritance tax. It is estimated that by the end of the decade (2029/30), around one in 10 deaths (9.5%) will be subject to inheritance tax due to the reforms [1].
Scott Gallacher, director at financial advice firm Rowley Turton, estimates that he's moving from around 10% of his clients facing a significant IHT issue to the majority of them in the near future due to the inheritance tax reforms [6]. Gallacher advises that it's vital people review their estate planning now, before these changes fully take effect [7].
The removal of the pensions exemption from inheritance tax is expected to be the biggest driver of the increase in inheritance tax liable deaths. With the nil-rate bands still frozen at up to £1m for a married couple, even relatively modest estates are at risk [4].
The proportion of deaths liable for inheritance tax rose to 4.62% in the latest tax year, an increase of 0.23 percentage points compared to the previous year [1]. London and the South East account for 44% of the total inheritance tax charged across the UK [8].
The lowest number of taxpaying estates were found in the North East of England, Northern Ireland, and Wales, which HMRC attributed to lower house prices in those regions [9]. However, with the new changes, even those with large pension pots may find themselves facing IHT liabilities.
Some people are choosing to avoid inheritance tax by giving their money away before they die, while others are spending their pension faster than they would have done. Many people have been accumulating large pensions for their IHT benefits, but with the new changes, they need an entirely new strategy [10].
In conclusion, the upcoming changes to IHT rules will have a significant impact on many Britons. It's crucial to review one's estate planning and seek professional advice to navigate these changes effectively.
- With the upcoming changes in Inheritance Tax (IHT) rules, wealth-management strategies may need to be altered to account for the inclusion of pension funds and death benefits, potentially requiring a shift in personal-finance planning.
- As a result of the reforms in the UK's IHT rules, the value of pension funds could increase personal-finance liabilities for beneficiaries, making wealth-management and personal-finance considerations essential in estate planning.
