Autumn Budget Update: Pensions and the newly proposed inheritance tax rules

Pensions and the New proposed Inheritance tax rules

Starting April 6, 2027, pension funds will no longer be exempt from Inheritance Tax (IHT). Here’s what that means in simple terms:

What’s Changing?

Right now, if you have a pension fund and you pass away, your beneficiaries (like your family) can inherit that pension money without paying inheritance tax on it. But from April 6, 2027, that will change. After this date, if your beneficiaries inherit money from your pension, and your total estate exceeds your available nil rate band(s), a 40% inheritance tax will need to be paid on the amount in excess of your nil rate band(s). As with other elements of your estate, if passing to a spouse/civil partner, there is no inheritance tax payable at that point.

Why is This Happening?

The government says this change closes a “loophole” left by previous policies, aiming to tax pensions like other parts of someone’s estate (e.g., savings, property).

How Will This Work?

The government is currently running a consultation to figure out the details. But here’s what’s expected:

• The tax will be handled by the pension provider (the administrators of your pension fund).
• The tax money will come directly from the pension fund itself, meaning beneficiaries do not have to pull money out of the pension (which could have additional income tax liabilities) to cover the inheritance tax.

What Does This Mean for You?

If you have a larger estate or pension, this change could impact how you plan your finances. Here’s what may shift:

1. Estate Value: Pensions will count toward your total estate value, so if your combined assets exceed the IHT threshold (the “nil-rate band”), they’ll be taxed at 40%.
2. Accessing Pensions Earlier: Since pensions will count toward inheritance tax, you might consider using your pension fund sooner rather than leaving it to grow and incur tax on death.
3. Estate Planning: For people with substantial pensions, this could mean paying more in taxes.

 What’s Next?

The government is holding a consultation until January 22, 2025, to work out the details. Once it’s complete, they’ll release final guidance on how pension providers will need to handle and report this tax.

Overview

Right now, the government is gathering feedback on these proposed changes, so there’s a slim chance they might change course and drop the idea altogether. Sometimes, this approach is used to gauge public reaction—introducing a plan that could later be scrapped to boost public support.

In the meantime, this impacts decisions around taking the 25% tax-free lump sum from pensions. People who expect to leave some of their pension funds unused may want to consider taking this tax-free lump sum now and possibly gifting it. Even if it isn’t gifted, withdrawing it could mean their beneficiaries won’t have to deal with potential double taxation on those funds within the pension scheme after their death. This is dependent upon each individual’s circumstances and you should seek advice before acting.

In addition, these changes will likely make people use their pension funds first, rather than other savings, during their lifetime. This way, they can leave cash for their beneficiaries, who won’t have to pay income tax on money withdrawn from a pension fund they inherit.

It is also likely to tip a significant number of estates over the £2m threshold whereby the residence nil rate band is reduced or lost entirely.

Get in Touch

To explore how these developments might affect your personal situation, connect with our award-winning team of Chartered Financial Planners today.

Ramsbottom office: Email enquiries@rosebridgeltd.com or call 01204 300010

Chester office: Email enquirieschester@rosebridgeltd.com or call 01244 569141

Leeds office: Email enquiriesleeds@rosebridgeltd.com or call 0113 243 7100

Please note

The contents of this article are based on our understanding of the details contained in the Autumn 2024 Budget, current taxation law and HMRC practice, which may change. The article is for information purposes and should not be relied upon nor be deemed to be or constitute advice. The Financial Conduct Authority does not regulate Tax and Estate Planning.