Inheritance Tax on inherited pensions from April 2027
01 November 2024The dust from the Budget is now settling and additional information and consultation papers have been issued to look in more detail at future tax changes. Pensions made an appearance in the announcements, and we have looked at this further.
With the Autumn 2024 Budget documents it is confirmed that:
The government is also removing the opportunity for individuals to use pensions as a vehicle for inheritance tax planning by bringing unspent pots into the scope of inheritance tax from April 2027, which will affect around 8% of estates each year.
HMRC furthered this Budget note and has issued a consultation to the industry, open to 22 January 2025 on the processes on how this tax would be applied. They note:
As announced at Autumn Budget 2024, from 6 April 2027 most unused pension funds and death benefits will be included within the value of a person's estate for Inheritance Tax purposes and pension scheme administrators will become liable for reporting and paying any Inheritance Tax due on pensions to HMRC. This consultation seeks views on the processes required to implement these changes.
More details on the consultation can be found here: https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/technical-consultation-inheritance-tax-on-pensions-liability-reporting-and-payment#part-2-inheritance-tax-on-pension-funds-and-death-benefits
I am sure it will be a little while before the results of the consultation will be known.
Within the web document, it notes:
If the beneficiary draws down the inherited pension to reimburse the Personal Representatives for Inheritance Tax, they may then also be liable to pay Income Tax on those funds at their own marginal rate. This can lead to a situation where an additional Income Tax charge arises on funds which have already been subject to Inheritance Tax.
Risk of Double Taxation?
It is clear that there is a future risk of double taxation (income tax and inheritance tax) being applied to inherited pension benefits in the future under the current government.
We will await the outcome and clarification of the consultation, noting that it seems to be the process rather than the planned application in just over two years' time that is being checked.
Summary
We will aim to keep our clients and contacts updated as more information becomes available, and to ways forward in the pension advice process as we approach this change in 2027. With some time ahead, in most cases, no immediate changes should be required.
No individual advice is provided during the course of this blog.
Keith Churchouse
Director
CFP Chartered FCSI
Chartered Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.
