In her Autumn Budget the Chancellor announced that from 6 April 2027, many lump sum and other death benefits will be included in the value of the deceased person's estate for Inheritance Tax (IHT) purposes, subject to the usual nil rate band of £325k and exemptions for transfers to a spouse, civil partner or charity. HMRC has published a technical consultation on the implementation of this change, which closes on 22 January 2025.
The Chancellor's announcement was expressed both as a levelling of the playing field – so that public service and private sector pension schemes, as well as discretionary and non-discretionary death benefits, are treated more equally – and as implementing a policy intention of preventing the use of pensions as a tax-advantaged vehicle for inter-generational / point-of-death wealth transfer.
The change is, on paper at least, meant to apply equally to DB and DC arrangements of all complexions in all sectors, as well as to non-UK schemes. In practice, we expect to see widely differing practical effects and some advisers have managed to devise case studies where the combined effect of income tax and IHT could result in a peak effective tax rate in excess of 90%.
In the public sector, the main change is likely to be an administrative one, since scheme administrators are to liaise with personal representatives before deducting and paying an appropriate amount of IHT. To avoid paying interest, they will need to do this within six months of any relevant death instead of the current period of two years, piling on the pressure in cases where there is a decision to be made as to the recipient.
For more information on the Budget announcements, read our tax team's top Autumn Budget takeaways. If you would like to discuss anything raised in this blog in more detail, please get in touch with a member of the pensions team or your usual Brodies contact.
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