UK Inheritance Tax and Pension Funds

Maplebrook Services
May 1
2 min read

In the Autumn Budget 2024, the Chancellor said that inheritance tax thresholds, which are the amount you can pass on when you die before inheritance tax is due, are staying the same until 2030. But, from April 2027, pensions will no longer be exempt from inheritance tax. That means that inheritance tax may have to be paid on your pension fund balance when you die.

How inheritance tax on pensions currently works

Currently, defined contribution pensions, where you build up a pot of money to give you an income when you retire, wouldn’t normally be part of your estate and there would be no inheritance tax to pay. The ‘estate’ simply means all the assets, like a house, investments or valuables, that someone owns when they die. But from 6 April 2027 defined contribution pensions will be subject to inheritance tax if your estate exceeds the various inheritance tax thresholds. The standard rate of inheritance tax is 40%.

OK, that’s the bad news. What’s even worse is that if you are over the age of 75, the

A pile of diverse British coins, including one-pound, two-pound, and smaller denominations, featuring various historical designs and text.

beneficiaries of your pension pot will be subjected to income tax at their highest rate of tax which could be say 45%.

To illustrate the overall potential tax deduction, say there is an unused pension pot balance of £100,000 of a person aged 76 at time of passing who has utilised her inheritance tax thresholds elsewhere. She is a widow (no living spouse) and therefore is leaving the money to her daughter who is a relatively successful person earning in excess of £125,000 p.a. and therefore subject to income tax of 45% on any additional income.

After 6 April 2027, tax could be deducted as follows:

Pension fund	£100,000
Inheritance tax @ 40%	£ (40,000)
Fund available to beneficiary	£ 60,000
Income Tax @ 45%	£(27,000)
Net receipt	£(33,000)

AN OVERALL TAX RATE OF 67% !

For those individuals who have become UK non resident for more than 10 years, there may be opportunities for dramatically reducing such a dramatic “tax take”.

We work closely with other professionals to endeavour to provide effective options in appropriate circumstances.

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