Inheritance Tax (IHT) is often one of the biggest barriers to passing wealth down to the next generation. Currently, unused private pensions are typically passed on without tax. But from April 2027, pensions will be included in your estate and subject to inheritance tax. This change means a growing number of families could find themselves paying more tax than expected.
Inheritance Tax Affecting Pensions
Pensions sit outside your estate for Inheritance Tax purposes, making them one of the most tax-efficient ways to pass on wealth to your heirs. From April 2027, pension value will also be included to your estate’s inheritance tax calculations.
Inheritance Tax is applied when estates are above:
- £325,000 (standard nil-rate band), or
- £500,000 if a home is left to children or grandchildren (residence nil-rate band).
Anything above these thresholds may face a 40% tax on inheritance.
This raises the question: Is it fair for pensions to be treated the same as other assets?
Gifting Ahead of Time
Individuals are responding to the changes by gifting money early to reduce the size of an estate. However, rules apply, and careful record-keeping is key. Keeping records of any gifts including details of the amount, date, and recipient of each gift, as this information is needed for the executor.
Inheritance Tax Free Conditions
Annual exemption of £3,000. If you don’t use it, it can be carried forward one year if unused, making a maximum of £6,000.
You can give small gifts of up to £250 per person annually, if you haven’t already applied your £3,000 annual exemption to those individuals. For wedding gifts, the permitted amounts are more generous. You may gift up to £5,000 to your child, £2,500 to a grandchild, and £1,000 to any other person.
Gifts of larger value fall under the seven-year rule for inheritance tax. If you survive for seven years after giving the gift, it becomes exempt from inheritance tax. However, if you pass away within that period, the gift may be subject to tax. The taper relief reduces the rate each year after the third year.
The 7 Year Rule
Larger gifts fall under the seven-year rule:
- Die within 3 years: Full 40% inheritance tax applies
- 3 to 7 years: Reduces the rate each year, as low as 8%
- Surviving the 7 years: No tax is due on the gift giving
However, all transfers between spouses or civil partners are exempted from inheritance tax.
Conclusion
The changes to pensions moving into the taxable estate from 2027 highlights that estate planning is more important than ever. The good news is that there are still ways to prepare and plan ahead for your family. Individuals have already started gifting while their alive and regularly reviewing their wills to secure family wealth for next generations.
