Changes to the way pensions are treated for inheritance tax from April 2027 are prompting individuals with significant pension assets to reconsider how their retirement savings fit into wider estate planning.
Under the planned changes, unused pension funds will be brought into the value of an individual’s estate for inheritance tax purposes. This could materially alter the amount available to beneficiaries, particularly where pension wealth forms a substantial part of an overall estate.
The changes could also affect the residence nil-rate band available to some estates. Where the inclusion of pension assets increases the value of an estate beyond the relevant thresholds, families may lose access to some or all of this additional allowance.
There can also be an income tax consideration for beneficiaries. Where the person who died was aged over 75, withdrawals from an inherited pension can be subject to income tax at the beneficiary’s marginal rate. This creates the potential for pension assets to face both inheritance tax and income tax, depending on the circumstances.
The changes mean that the traditional approach of spending other assets first and retaining pension savings for beneficiaries may no longer produce the same tax outcome after April 2027.
Arbuthnot Latham illustrates the potential impact through the example of a 75-year-old retired doctor with a £1m personal pension, alongside property and investment assets. Under the example, bringing the pension into the taxable estate would increase the inheritance tax exposure and affect the availability of the residence nil-rate band.
The bank’s example highlights the importance of reviewing pension arrangements before the new rules take effect. Rather than considering pensions separately, estate planning can involve looking at pensions alongside investments, property, trusts, gifts and available tax allowances.
One potential approach is to make use of available tax-free pension entitlements and consider whether withdrawn funds could be repositioned into assets that may qualify for business relief. Arbuthnot Latham says qualifying business relief investments can reduce the taxable value of an investment for inheritance tax purposes, subject to the relevant conditions and holding periods.
Arbuthnot Banking Group PLC (LON:ARBB), operating as Arbuthnot Latham, offers private and commercial banking products and services in the United Kingdom. Established in 1833, Arbuthnot Banking is headquartered in London, United Kingdom.
