The recent Autumn Budget has brought significant changes to pension inheritance taxation, effective from 2027.
- Currently, inherited pensions are not subject to inheritance tax (IHT), but this will change under new rules confirmed by Rachel Reeves.
- The loophole allowing tax-free inherited pensions, especially after the lifetime allowance was abolished, will be closed.
- For deaths before age 75, pensions remain tax-free; post-75, recipients will pay income tax at their marginal rate.
- The move is part of wider pension reforms aimed at addressing perceived inequities in tax avoidance.
In an important development from the Autumn Budget, Rachel Reeves has announced a shift in how inherited pensions will be taxed. From 2027, pensions passed on after death will become subject to inheritance tax (IHT), a stark change from their current tax-exempt status. Reeves highlighted that this alteration aims to address a loophole that had been widened with the previous government’s decision to abolish the lifetime allowance.
Under existing regulations, pensions do not form part of the taxable estate, thereby escaping inheritance tax upon the pension holder’s demise. However, the reform will see inherited pensions included in estate assessments for IHT purposes. Reeves emphasised the necessity of this change, citing fairness in tax policy as a driving principle.
Despite this impending change, the rules regarding pension death benefits remain unchanged in certain respects. If a pension scheme member passes away before reaching the age of 75, the benefits passed on remain exempt from tax. Nevertheless, if the death occurs after the age threshold of 75, the beneficiary will be liable to pay income tax at their marginal rate. This nuance in the policy maintains some of the existing stipulations about pension inheritance.
These changes come amidst broader discussions and reforms aimed at reshaping the pension landscape. By closing what is seen as a tax loophole, the government intends to ensure a more equitable dispensation of tax benefits. The move signals a continued effort to rectify disparities in how inherited wealth is taxed, aligning pension tax with other forms of inheritance.
This reform reflects a strategic shift towards addressing tax equity in pension inheritance.
