Major revisions to Inheritance Tax regulations have the potential to impact your pension funds, even if you have not yet retired. Currently, inheriting a pension from someone who passed away before the age of 75 does not incur Inheritance Tax. However, if the individual passed away after turning 75, Income Tax is applicable when funds are withdrawn from the inherited pension.
Starting from April 2027, inherited pensions will be subject to Inheritance Tax and included in the deceased’s “estate,” along with property, assets, and finances. This change will apply even if the individual passed away before reaching the minimum pension access age, currently set at 55 and increasing to 57 from April 2028.
According to the HMRC, death in service payments will not be subject to Inheritance Tax. The goal is to encourage pension savings for retirement purposes rather than as a means of transferring wealth. Following these adjustments, more than 90% of estates annually will remain exempt from Inheritance Tax.
Inheritance Tax is typically triggered when the estate value exceeds £325,000, although this threshold can be higher depending on the beneficiaries. There are exemptions, such as no Inheritance Tax for estates left to a spouse or civil partner. Transferring a home to children or grandchildren can raise the threshold to £500,000, comprising the standard £325,000 allowance plus an additional £175,000.
Couples can potentially pass on up to £1 million without Inheritance Tax implications, with the standard tax rate set at 40%. Strategies to reduce Inheritance Tax include leaving a portion of the estate to charity, which can lower the tax rate from 40% to 36% on certain assets.
Optimizing Inheritance Tax payments can be achieved through careful estate planning strategies and leveraging available allowances and exemptions.
