Pensions to be brought into Inheritance Tax Regime

Don’t panic, pensions are still generally the most efficient way to save for retirement and for higher earners could still be one of the more efficient ways to pass on assets, given contributions attract marginal rate tax relief up to 45% and growth within the pension has no tax.

Large pensions that have had benefits accrued over £1,073,100 are already potentially taxed on death post-75 at income tax rates for beneficiaries, and all assets will now be a flat rate of 40% over IHT thresholds from 2027, in-line with IHT. It isn’t clear how this would be implemented given this doesn’t take effect until 2027, and the big question remains as to if an IHT tax charge at 40% is levied, and beneficiaries then pay income tax on the pension subsequently received. I hope this isn’t the case, as this changes the narrative of pensions significantly.

Labour are also partly undoing their own tax reliefs designed to allow for the continuation of small businesses on death, with Business Property Relief implemented in 1976. Rather than 100% Inheritance Tax (IHT) relief for qualifying businesses, 100% relief will be afforded to the first £1m of assets held, and 50% IHT relief thereafter changing the rate of tax from 40% to 20% as a result of holding these assets. The same will apply to Agricultural Relief. Aside from hurting SME’s, the irony is that the ultra-wealthy, who can afford to give assets away, can still see IHT payable at a lower effective rate than those with medium sized estates, given there are no changes to 7-year gifting rules. Popularity of Trusts have waned over the last few years, and I’d expect this to reverse as a result.

Capital Gains Tax on investments increased from today, to 18% and 24% in line with rates on properties. The use of Pension and ISA allowances for investors becomes more important than ever.

Given the changes to reliefs available from April 2026, for an SME business owner, or those owning Agricultural Property – if you want your business to continue after your death, you’ll probably need to consider either insurance for your life for up to 20% of the businesses/lands value over £1m, or holding liquid assets to pay an IHT bill that may not currently be due.