Major revisions to Inheritance Tax regulations may lead to the potential depletion of your pension funds prior to your retirement age. Previously, inheriting a pension from an individual who passed away before the age of 75 did not incur any Inheritance Tax liabilities. However, if the deceased was over 75, Income Tax would apply when withdrawing funds from the inherited pension.
Effective April 2027, inherited pensions will be subject to Inheritance Tax and included in the deceased’s estate, which encompasses property, assets, and funds. This change will be applicable even if the individual passed away before being eligible to access their pension, with the age threshold for pension access increasing from 55 to 57 in April 2028.
It has been confirmed that these alterations will impact individuals irrespective of their pension access age. Additionally, death in service payments will remain exempt from Inheritance Tax. According to a spokesperson from HMRC, the adjustments aim to promote pension savings for retirement purposes rather than as a means of wealth transfer. The majority of estates, over 90% annually, will continue to be exempt from Inheritance Tax following these modifications.
Presently, few families are subject to Inheritance Tax, which is only applicable to transfers made within seven years of the individual’s death. Gifts made more than seven years before death are not liable for Inheritance Tax, while gifts within the seven-year timeframe are subject to taper relief starting at 32%.
Inheritance Tax is triggered when the estate value exceeds £325,000, though this threshold can vary based on the recipient of the estate. For instance, leaving the estate to a spouse or civil partner incurs no Inheritance Tax. Transferring the home to children or grandchildren can raise the Inheritance Tax threshold to £500,000, including the basic allowance of £325,000 plus an additional £175,000.
Couples can potentially pass on up to £1 million without Inheritance Tax implications. If Inheritance Tax applies, the standard rate is 40%, but there are strategies to reduce the tax burden. Leaving at least 10% of the net estate value to charity in the will can lower the Inheritance Tax rate on certain assets from 40% to 36%.
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