Families could face a 'triple tax blow' from April 2027 due to upcoming inheritance tax (IHT) changes. Most unspent pensions are set to become subject to IHT from this date, potentially leading to some families facing IHT, an income tax bill, and the loss of the residence nil-rate band allowance.
Currently, estates worth less than £325,000 are not subject to IHT, and a further £175,000 allowance, known as the residence nil-rate band, applies when passing a home to a direct descendant. Unused amounts from these allowances can be passed to a spouse or civil partner, meaning some estates up to £1 million can have no IHT liability. However, the residence nil-rate band is reduced for estates worth over £2 million and can be lost entirely for single individuals with estates of £2.35 million or more, or couples with estates of £2.7 million or more.
The inclusion of most unused pensions in estates for IHT purposes from April 2027 could result in more people losing their residence nil-rate bands. Additionally, beneficiaries already pay income tax on unused pension funds if the deceased was 75 or older. Calculations by insurance firm NFU Mutual suggest some estates may face an effective 91% tax charge on inherited unused pensions.
Adam Cole, a retirement specialist at Quilter, noted that while these are extreme scenarios, many more families will find pensions that were previously outside the inheritance tax net are now contributing to larger tax bills.