Major IHT Change Affects Pension Wealth Planning
From 6 April 2027, the government will bring unused pension funds and pension death benefits within the scope of Inheritance Tax. This represents a significant change to how pension wealth is taxed on death, affecting entrepreneurs, business owners and anyone saving for retirement through a pension scheme.
The government estimates that around 38,500 estates will face higher Inheritance Tax bills than before, with an average liability increase of approximately £34,000 when pension assets are included. For an additional 10,500 estates, Inheritance Tax will be due where previously none would have been payable.
Why This Matters for SME Owners and Directors
Many business owners and directors have used pension schemes as an efficient way to save for retirement whilst gaining tax relief. From April 2027, this strategy requires reconsideration. The change affects the value of your personal estate for IHT purposes and may have implications for your business succession planning.
Personal representatives (executors) will be liable for reporting and paying any Inheritance Tax due on pension benefits. The good news: if Inheritance Tax is due, beneficiaries can request the pension scheme administrator to withhold 50% of the benefits for up to 15 months from death, allowing time to pay the tax.
What You Should Do Now
SME owners and directors with significant pension savings should review their tax planning strategy with their accountant before April 2027. Consider whether your current pension arrangements still align with your business planning and succession goals. Those planning significant gifts or inheritances should act now whilst current IHT rules apply.
One exception: death in service benefits paid directly from your pension scheme will be excluded from your estate, so these remain an efficient planning tool.
Source: GOV.UK Inheritance Tax on Unused Pension Funds and Death Benefits