Pension and Inheritance Tax
As pension changes announced in the October 2024 budget start to settle, we wanted to update you on the latest developments and responses to the recent pension and inheritance tax consultations.
On 21st July, the Government published their response to the consultation on their proposals for death benefits and Inheritance Tax on pensions. There is still more information and legislation to settle here, but the government have confirmed that they will proceed with their previously announced plan to implement changes from 6 April 2027.
We have highlighted the main points for consideration below as things stand:
Discretionary pension death benefits such as those paid under SIPPs (self-invested personal pensions) will be subject to potential Inheritance Tax (IHT) of 40%.
The IHT calculations are based on the combined value of the deceased’s estate including all remaining pension arrangements where the value exceeds the IHT Nil Rate Band (NRB) (currently £325,000 per individual plus a potential further £175,000 for the Residence Nil Rate Band (RNRB), less any considerations such as failed gifts to individuals or trusts).
It has been confirmed that the reporting obligations for IHT on pension accounts will now fall to the personal representatives (PR’s) of the deceased’s estate. This replaces the proposals for the Pension Scheme Administrators to be responsible for reporting or paying the Inheritance Tax.
The updates propose that, in circumstances that where both Income Tax and Inheritance Tax has been paid on pension death benefits (for example in cases where the deceased was over 75 when they died), the beneficiaries will be able to claim a refund of income tax paid where they or the estate have paid Inheritance Tax direct. This should avoid a double tax take in many cases.
The requirement to pay Inheritance Tax due on pensions within six months of death remains, with interest on late payments Accruing after that date. However, the IHT can be paid from the estate, rather than the pension fund if any liquidity issues arise.
The six-month deadline for Inheritance Tax payment remains challenging for Personal Representatives. It will be interesting to see if further changes are made here, as dealing with the overall estate could be complicated with a tight deadline remaining for reporting and payment.
Possible Planning Points for clients:
Inheritance Tax will only apply where overall estates including pensions exceed the available NRB and RNRB. This is dependent on who the pension is left to under a death benefit nomination or Expression of Wish form as interspousal exemptions still apply on first death. This has been confirmed as being covered under ‘Exempt Beneficiaries’, so spouses and civil partners. Death benefits designated to these beneficiaries will be Inheritance Tax free. This means the Inheritance Tax on pensions will only apply following the death of the second spouse/partner.
In extreme cases, you may wish to consider getting married if you are not already.
Payments to charities remain exempt from Inheritance Tax.
Death-in-Service benefits paid from a UK registered pension scheme will not be subject to Inheritance Tax. This traditionally refers to pension life cover (for example 4 x salary) but we are exploring the full meaning of ‘death in service’ benefits and what opportunities this provides.
There certainly appears to be a possibility of the pension life insurance market being resurrected, although we don’t know of any insurance companies currently offering this.
Joint life annuities for unmarried partners and children will be excluded from Inheritance Tax as the survivor’s pension rights are not considered part of the deceased’s estate. The annuity market may well see a boost as a result.
Pension recycling can be used to move funds from one pension scheme member to another. This is achieved by a member withdrawing taxable pension and paying it back into the pension scheme as third-party contributions for another member or members who can claim income tax relief on the amount paid. This device could be used to transfer funds from the older generation to the younger one on a broadly tax neutral basis.
Increasing pension income to make further gifts remains an option and this can be carried in several ways, as outright gifts, gifts to trusts, or potentially making gifts using a ‘normal gifting from net surplus income’ IHT exemption.
Whilst some clarification has now been given relating to valuation requirements, how information is shared and payment options, it is important to note that the administration upon death of a pension member still seems complicated. Many more consultation processes are still to follow and refinement of the pension legislation needs to be confirmed before these changes come into full effect.
City Asset Management will continue to monitor implementation changes as the 6 April 2027 implementation date approaches, but individual advice remains key to ensuring the best outcome for our clients.
If you or someone you know would like to discuss any of the above with a member of the financial planning team, please do not hesitate to contact City Asset Management.
David Bethell
David is a Financial Planning Consultant who has been with City Asset Management for over 12 years. He enjoys helping people meet their objectives through effective planning and his experience looking after elderly parents has given him a greater understanding of vulnerable clients and their longer-term planning needs. Before joining the firm, David worked in financial services roles at National Mutual, LV and Hornbuckle Mitchell. He is both a Chartered Financial Planner and a Fellow of the Personal Finance Society after achieving a range of qualifications covering pensions, investments, insurance, trust and tax planning, and long term care.
