Pensions will become subject to inheritance tax at a rate of 40% from April 6, 2027. Previously, pensions were not included in an individual's estate for inheritance tax purposes, but this is set to change.
The legislation for this new tax regime has been drafted, and affected individuals are advised to begin planning now. In addition to this change, there is speculation that further inheritance tax reforms could be announced in the upcoming Autumn Statement.
These potential changes might include a reduction in tax-free allowances, such as the £325,000 individual threshold and the £175,000 allowance for passing on a main residence to a direct descendant. The '7-year rule' for tax-free gifting could also be altered, potentially shortening the period required before a gift is no longer subject to inheritance tax upon death.
Further speculation suggests the introduction of tiered inheritance tax rates instead of the current flat 40% charge, with potential rates ranging from 30% to 45% depending on the value of the estate. Under current rules, a reduced rate of 36% is available if at least 10% of an estate is gifted to charity.
