Understanding the Impact of Upcoming Inheritance Tax Changes

In November 2024, the Chancellor announced plans to include pensions within the scope of inheritance tax. While this announcement caused considerable concern across the financial planning industry, the government has remained committed to implementing the changes. Although we await the final legislation, it is increasingly clear that the proposals will proceed. Some finer details remain uncertain, but the direction of travel is set.

The proposed changes are expected to take effect from 6th April 2027, under the leadership of Ms Reeves. This means that most pensions, which are currently exempt from IHT, will soon be included in your taxable estate.

These changes will bring many more estates into the IHT net. Even those who previously had no liability may find themselves facing significant tax bills. Let’s look at two case studies to illustrate the potential impact.

What you can do Now

These examples show how these changes could significantly affect your estate, and perhaps more pertinently, those who will become beneficiaries.

One of the most uncertain areas of this policy is how quickly or easily pension funds can act, as IHT bills need to be settled by the end of the sixth month after someone dies to avoid interest payments. Finding significant six-figure sums in cash presents a liquidity issue for many people anyway, but as these scenarios show, the amount due can quickly ratchet up. There’s no guarantee that the family home could sell in that time period either.

It is imperative that you review your financial affairs and overall strategy in the coming twelve months to ensure you’re prepared for these changes.