Hiding tax liabilities (IHT) through pension investments: Is it possible?
Starting in April 2027, inheritance tax (IHT) rules for pensions will undergo significant changes. From this date, unused pension funds (with some exceptions) will be incorporated into the calculation of an individual's overall estate for IHT purposes, making these assets subject to IHT for the first time[2][3].
Key Points:- IHT threshold: The standard IHT threshold remains unchanged at £325,000 per individual, and the residence nil-rate band continues at £175,000 when passing a home to direct descendants.[1][5]- Exemptions and Considerations: - Dependants' Scheme Pensions: These remain exemption from IHT. - Charitable Donations: Gifts made to charities are also exempt from IHT. - Spouse or Civil Partner: Pension income paid to a spouse or civil partner stays IHT-free if both are UK-domiciled.[3][5]
To minimize potential IHT exposure, consider the following strategies:
- Revise Retirement Decumulation Strategy:
- Asset Management: Rather than preserving all pension wealth, consider allocating pension assets alongside other savings and investments to achieve a balanced approach, which may help reduce the pension fund size and thus the IHT liability.
- Lifetime Gifting:
- Seven-Year Rule: Gifts made more than seven years before death usually fall outside your estate for IHT purposes. Regular gifts from surplus income can be immediately exempt if they meet certain criteria.
- Charitable Donations: Contemplate gifting to charities, as they are exempt from IHT.
- Beneficiary Planning:
- Choosing Beneficiaries Wisely: Spouses or civil partners remain exempt from IHT on pension death benefits. Other beneficiaries may face both income tax and IHT.
- Trust Consideration: Depending on your circumstances, setting up Trusts could be advantageous for managing pension wealth more effectively.
- Seek Professional Advice:
- Consult financial advisors to create an estate plan customized to your specific situation and maximize tax efficiency.
Adopting these strategies can help you effectively manage your pension wealth to mitigate IHT exposure when the new rules take effect in April 2027.
[1] GoV.UK. (2023). Inheritance tax: Who pays inheritance tax and which assets are exempt. Retrieved from https://www.gov.uk/inheritance-tax/who-pays-inheritance-tax
[2] Wealth Management Web. (2023). The new pension inheritance tax rules: What you need to know. Retrieved from https://wealthmanagementweb.net/news/the-new-pension-inheritance-tax-rules-what-you-need-to-know
[3] AJ Bell. (2023). Inheriting a pension: What you need to know. Retrieved from https://www.ajbellmedia.co.uk/policy/news/inheriting-a-pension-what-you-need-to-know
[4] HM Revenue & Customs. (2023). Inheritance tax: Who has to pay inheritance tax. Retrieved from https://www.gov.uk/inheritance-tax/who-pays-inheritance-tax
[5] The Telegraph. (2023). Inheritance tax rules: How they are changing and how to protect your wealth. Retrieved from https://www.telegraph.co.uk/personal-finance/house-and-home-bills/inheritance-tax/inheritance-tax-rules/
- To reduce the potential impact of inheritance tax (IHT) on your pension wealth, consider allocating pension assets alongside other savings, investments, and property for a balanced finance approach.
- A strategy for minimizing IHT exposure is to make gifts more than seven years before death, as they usually fall outside your estate for IHT purposes, under the Seven-Year Rule.
- Depending on personal-finance circumstances, setting up Trusts could be advantageous for managing pension wealth more effectively, helping to avoid or reduce IHT liabilities.
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