Navigating the 2024 Budget: Key Changes to Inheritance Tax on Pensions

The Autumn 2024 budget announced significant adjustments impacting the inheritance tax landscape for pensions, marking a notable shift in estate and retirement planning.

Summary of Changes

Starting from April 2027, inherited pension pots will be included in the IHT calculations. This change reverses their previously exempt status and represents a considerable shift for many estate plans. While the IHT nil-rate band remains frozen at ￡325,000 until 2030, the inclusion of pensions may result in a larger number of estates being subject to IHT, which already affects about 6% of estates

Detailed Implications

• Impact on Estate Planning: Pensions, long considered strategic for passing wealth tax-efficiently, will now count toward the total value of an estate. If the estate surpasses the IHT threshold, a tax rate of 40% will apply.
• Pre-75 and Post-75 Considerations: Under the current rules, benefits left by pension holders who die before age 75 are not subject to income tax for beneficiaries. However, if the pension holder dies at or after age 75, withdrawals by beneficiaries are taxed as income. This taxation structure remains but with the addition of IHT, the combined tax burden may lead individuals to reconsider how and when they access their retirement funds.

Examples

Death Before Age 75:

• Pre-2027: A ￡600,000 pension left to beneficiaries is not subject to IHT. Withdrawals by beneficiaries are also tax-free.
• Post-2027: The ￡600,000 pension is added to the estate for IHT purposes. Assuming no other assets, ￡275,000 above the nil-rate band could face a 40% IHT, totaling ￡110,000.

Death After Age 75:

• Pre-2027: A ￡600,000 pension is taxable as income when withdrawn by beneficiaries, but not included in the estate for IHT.
• Post-2027: The same pension faces IHT at 40% on amounts above the threshold and continues to incur income tax on withdrawals by beneficiaries

Considerations

• Retirement and Withdrawal Strategy: Individuals may now consider drawing down pensions earlier to prevent them from forming a significant IHT liability.
• Other Tax Advantages: The IHT spousal exemption remains beneficial, allowing estates passed between spouses to be exempt. However, unmarried partners may be disadvantaged as IHT could apply to pensions passed to.

The introduction of IHT on inherited pensions calls for a reassessment of estate strategies. This change is expected to expand the number of estates subject to IHT, pushing advisers and clients to rethink traditional retirement and wealth succession approaches.

This structured summary provides a comprehensive overview and prepares you for detailed discussions about your estate planning.

Check out our full budget breakdown at https://edwardsaccountants.co.uk/news/autumn-budget-tax-overview-2024/