Many clients have inquired about the recent Budget announcements and how the changes to pensions will impact inheritance tax (IHT).
At the moment, if you have a money purchase pension and you pass away without spending it, that pension does not form part of your estate for IHT purposes. This makes pensions one of the most tax-efficient ways of passing wealth to the next generation. In fact, we often advise clients to spend other assets first, keeping pensions back to help reduce potential IHT liabilities.
But from April 2027, the rules will change. Unused pensions will be included in your estate when calculating IHT. For some, this will mean a higher bill on death. For others, it could mean they face IHT for the first time.
What should you do now?
This change will affect families differently. The best starting point is to review your estate planning and make sure you have the basics in place:
- Check your Will – is it up to date and does it reflect your wishes?
- Calculate your estate value – include cash, property, investments and valuable assets (such as cars, jewellery and antiques).
- Review gifts – note down any money or assets you’ve given away in the last seven years.
- Understand the allowances – everyone has a nil rate band of £325,000 (or up to £650,000 for a couple on second death). If your home is passing to direct descendants such as children or grandchildren, you may also benefit from the residence nil rate band of up to £175,000 e ach. Combined, this can mean up to £1 million of allowances. These thresholds are frozen until 2030.
- Check your pension nomination – ensure it reflects your wishes. While not legally binding, it gives your beneficiaries choice in how to receive the funds, which can reduce tax exposure.
Because estate valuations can be complex, we recommend seeking legal and financial advice. The way gifts, exemptions and pensions are treated can make a significant difference.
Planning ahead
With allowances frozen and asset values rising, HMRC’s IHT receipts are already increasing. In 2024, £7.5bn was collected. When pensions are included from 2027, that figure is expected to rise further.
If you are concerned about IHT, there are options:
- Do nothing – accept that tax will be due.
- Spend more – by using your money for experiences and services, rather than acquiring new assets.
- Gift assets – either directly or through trusts, though these may only fall outside your estate after seven years.
- Invest – in Business Relief qualifying assets, which can become exempt after two years (though these are high risk and require advice).
- Insure against it – a life insurance policy can provide funds to cover some or all of the IHT bill, if set up correctly in trust.
How we can help
Every client’s situation is different. Estate planning is complex, and mistakes can be costly. Our private client solicitors work closely with our in-house independent financial advisers to review your assets, explain your options and put in place a plan that works for you and your family.
If you think these changes might affect you, now is the right time to review your estate plan and seek advice.
This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Some information quoted was obtained from external sources we consider to be reliable. All information is correct at the time of writing.
Tees is a trading name of Tees Financial Limited, authorised and regulated by the Financial Conduct Authority (FCA), Registered number 211314, and registered in England and Wales (Company number 4342506).
