In the Autumn Budget of 2024, UK Chancellor Rachel Reeves announced significant changes to inheritance tax (IHT) rules concerning pensions, set to take effect from April 2027. Currently, pension funds are exempt from IHT. However, under the new regulations, pension funds will be included in the value of an individual’s estate for IHT purposes.
By incorporating pension funds into the taxable estate, the government anticipates generating an additional £1.46 billion annually by 2030.
The implications of this change are substantial. Beneficiaries of inherited pensions may face a combined tax burden of both IHT at 40% and income tax at the beneficiary’s marginal rate, potentially resulting in an effective tax rate as high as 67%.
This development necessitates a reassessment of retirement and estate planning strategies. You may need to consider adjusting your UK pension plans including transfers and gifting allowances to mitigate potential tax liabilities. We recommend you review your pension plans well ahead of the 2027 implementation date to ensure alignment with the new tax landscape.
