Occupational Pensions Subject to IHT, But Not to Extent First Proposed
Inheritance tax will be chargeable on UK registered occupational pensions from 6 April 2027, the government has confirmed, but not quite to the extent many experts and others were expecting. Dependants’ scheme pensions will not, for example, be targeted.
The move is the latest development in the Labour Government’s drive to maximise tax receipts, but its intentions to grasp a larger proportion of people’s wealth when they die has attracted much criticism.
IHT will only be payable if the total net value of the estate exceeds the nil rate band (currently £325,000), subject to the exemptions and reliefs available at the relevant date; and most estates will continue to have no IHT liability after 6 April 2027.
The government estimates that out of 213,000 estates with inheritable pension wealth in the year 2027-2028, only 10,500 additional estates will have an IHT liability.
Final proposals
Under the latest proposals, most death benefits paid from registered pension schemes - including death in service benefits – will now form part of the deceased member’s estate for the purposes of IHT. Currently, death benefits from registered pension schemes are ring-fenced and not included in the valuation of a deceased’s estate for IHT purposes.
Following an initial consultation, the government has now responded with draft legislation on IHT and occupational pensions (a consultation on this closed on 15 September). It has confirmed that occupational pensions will be brought into the scope of IHT with the exception of:
· Dependants’ scheme pensions, which will still fall outside of a deceased’s estate for the purposes of IHT. This includes, for example, pensions paid to the deceased’s spouse, children or other dependants
· All death in service benefits will also be excluded from deceased’s the estate for IHT purposes – even if they are discretionary
Once the new rules are implemented, it will be for the personal representatives to report and pay any IHT due on death benefits or unused pension funds. Original plans to make pension scheme operators responsible for reporting and paying IHT were dropped after concerns were raised that it would be too onerous.
Changing the rules, says the government, “removes distortions which have led to pension schemes being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for funding retirement”. It says the changes will also make the treatment of different types of pension more consistent.
It is expected that the measures will increase inheritance tax revenue by £640m in the tax year 2027-2028 and £1.46bn by 2029-2030.
For expert advice on how the changes could impact you, contact the specialist tax team at NGM Tax on [ ]
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