Households are advised to consider their pension plans in detail before the 2027 Inheritance Tax adjustments come into force.
Inheritance Tax is Set to Rise to 91%, as UK Households are Urged to Rethink Their Pension Plans
By Chourouk Derkaoui
Published on 7 November 2024 18:35
Inheritance tax raid by the Labour government has led to a 91% tax burden on pensions for UK households. With inheritance tax set to change in 2027, households are advised to consider their pension plans carefully.
Labour’s 2027 Inheritance Tax May Hit Pensions at 91%
Labour's plan to include pension funds in the inheritance tax calculation from 2027 could lead to effective tax rates on inherited pensions for families of up to 91%. Death benefits and unused pension funds will be included in a person's taxable estate from April 2027.
Based on new figures provided by the groups following Rachel Reeves' budget, an estate of £2 million, including property but no pension, passed on to the direct descendants of a couple who died after the age of 75, would be subject to £400,000 in inheritance tax, leaving £1.6 million for the family.
Relatives would receive just £60,667 more under the new rules if the same estate includes a £700,000 pension, with an effective tax rate of 91%. Chris Etherington of RSM stated:“The Budget has set an additional bear trap for unwary taxpayers that could prove particularly painful for some.
"The tax system is full of complexities that can result in penal effective tax rates being applied in certain circumstances and this is another one for people to watch out for. There is still the opportunity for the Government to change the rules, but it looks unlikely at this stage. Those potentially impacted by this may therefore want to think about what they can do to lessen the anticipated tax blow to their pension pot."
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: "The dust has started to settle on a truly momentous budget and now it's time to think about what it means for our retirements. The major impact has been the decision to bring pensions into the scope of inheritance tax - a move that is expected to land many more families with a hefty bill and people will need to plan carefully."