Need to know
Most pensions are currently not subject to Inheritance Tax – but this is changing from April 2027
Pensions will soon become subject to Inheritance Tax(Image: GETTY)
What you need to know about pensions and inheritance tax April 2027 changes
- If you inherit a pension from someone who died under the age of 75, you pay income tax when you start to take money from the inherited pension. If they die after the age of 75, then you normally pay income tax.
- But most pensions are currently not subject to Inheritance Tax. This is changing from April 2027, when they will be included in the “estate” – which also includes property, possessions and money – of someone who has died.
- This will even apply if the person died before reaching the age at which they can start accessing their pension. This is currently set at 55 but is rising to 57 from April 2028.
- Death in service payments, which is a tax-free, lump-sum provided by employers to a designated beneficiary if an employee dies while on the company payroll, will not be liable for Inheritance Tax.
- Government figures estimate that 10,500 estates will pay Inheritance Tax for the first time as a result of the changes to the rules, and 38,500 will pay more Inheritance Tax.
- At present, not many families end up paying Inheritance Tax due to thresholds that are in place, and that Inheritance Tax only applies to transfers made within the seven years before someone has died.
- For gifts given within the seven years before someone has died, it is taxed on a sliding scale known as “taper relief” which starts at 32%.
- Inheritance Tax is also only due if the value of your estate is above £325,000 – although this can actually often be much higher depending on who you leave your estate to. For example, there is no Inheritance Tax to pay when an estate is left to your spouse or civil partner.
- If you give away your home to your children then the Inheritance Tax threshold can increase to £500,000. This includes the basic £325,000 allowance, plus an additional £175,000.
- If you are married or in a civil partnership, any Inheritance Tax allowance that isn’t used can be passed on when someone dies. This means a couple can potentially pass on as much as £1million to their descendants without their estate being subject to Inheritance Tax.
- If your estate is subject to Inheritance Tax, then the standard rate is 40% – but there are ways to reduce this.
- For example, your rate of Inheritance Tax on some assets is reduced from 40% to 36% if you leave at least 10% of the net value after any deductions to a charity in your will.
- READ THE FULL STORY: Inheritance Tax rule change confirmed and how it will affect your loved ones
