With the amount of inheritance tax (IHT) paid by families in the UK having reportedly risen from £3.1bn in the 2012/13 tax year to £7.5bn in the 2023/24 tax year, understanding its impact and making thoughtful estate planning was already the focus of many a retiring baby boomer and tax advisor.
That debate has intensified since the chancellor Rachel Reeves set out plans in the Autumn Budget to reform IHT. In particular, the announced plan to include (from April 2027) unused pension funds within the value of a person’s estate for IHT purposes is said to be causing a widespread “post-Budget pensions rethink”.
As pension funds have historically been exempt from IHT, they have often been used as a tax efficient way to transfer wealth between generations. However, as commented in a Financial Times article on 1 November 2024, “Under Reeves’ measures (which are due to raise £1.46bn a year by April 2030 according to government estimates), inherited pensions face double taxation if the saver is 75 or older when they die (income tax is not levied on the pensions of savers who die before turning 75). In addition to falling in the scope of IHT, charged at 40%, inheritors of pensions pay income tax on the proceeds at 20%, 40% or 45% depending on whether they pay the basic, higher or additional rate. This could amount to a levy of up to 52% for basic rate taxpayers, rising to 67% for additional rate taxpayers.”
If you are a grandparent of a young child and are rethinking your estate planning, and considering how you can best help shape your grandchild’s future, you will undoubtedly be intrigued by a recent article on the subject in Absolutely Education, written with our collaboration: A legacy of learning: how you can invest in your grandchild’s future.
This post does not constitute financial advice and should not be relied upon as such. Tax treatment depends on each individual’s circumstances. For guidance, please seek professional advice.
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