Pensions and IHT: Upcoming changes and timeline

The government is considering significant changes to the Inheritance Tax (IHT) rules regarding pensions, expected to come into effect from April 2026.

What will change?

Currently, pensions are generally exempt from IHT, allowing individuals to pass on their pension pots to beneficiaries without incurring IHT charges. However, the proposed changes may include:

• Introduction of IHT on pensions: Pensions could become subject to IHT, meaning that a portion of the pension pot may be taxed upon the pension holder’s death.
• Threshold adjustments: The tax-free threshold for IHT on pensions might be adjusted, potentially lowering the amount that can be passed on tax-free.
• Apportionment of IHT: The estate and the pension fund(s) will pay its own portion of IHT and therefore, more communication and complex IHT calculations will be required to deal with the IHT allocation.

Impact on IHT planning and Will writing

These changes could significantly impact IHT planning and will writing for clients.

1. Increased tax liability: With pensions potentially becoming subject to IHT, the overall tax liability on an estate could increase, reducing the amount beneficiaries receive.
2. Revising estate planning strategies: Clients may need to revisit their estate planning strategies to mitigate the impact of these changes. This could involve exploring alternative ways to pass on wealth, such as through trusts or lifetime gifts.
3. Updating Wills: Clients will need to update their wills to reflect the new IHT rules and ensure their wishes are carried out in the most tax-efficient manner.

Take action now

To safeguard your IHT planning and future pension plans, it’s crucial to take action now:

• Consult with a financial advisor: Professional advice can help you understand the potential impact of these changes and develop strategies to minimise IHT liability.
• Review and update your Will: Ensure your will is up-to-date and reflects the latest tax rules to protect your beneficiaries.
• Consider alternative wealth transfer methods: Explore options like trusts or lifetime gifts to reduce the potential IHT burden on your estate.

By staying informed and proactive, you can navigate these changes and ensure your financial legacy is preserved for your loved ones.

Brachers have a dedicated wills and estate planning team that can discuss your circumstances with you. It is sometimes very useful to have a collaborative approach with your financial adviser to discuss the pensions so that all avenues are explored and covered in your IHT planning.

This content is correct at time of publication