Inheritance tax thresholds will remain frozen until 2030, Chancellor Rachel Reeves has confirmed in her Autumn Budget.
Under the current rules, an individual can pass on up to £325,000 in assets with no inheritance tax to pay.
Any unused allowance can be passed to a spouse or civil partner when you a die, meaning there is an effective £650,000 tax-free threshold when the second partner dies.
There is also an additional residential nil-rate band of £175,000 when a home that was the deceased’s primary residence is being passed on to a direct descendant, and this allowance can likewise be passed on to a partner when you die.
Although these thresholds will remain in place, the Chancellor has announced that pensions will become subject to inheritance tax from 2027.
Mike Ambery, retirement savings director at Standard Life, part of Phoenix Group, said: “Pensions have been seen as useful tool for estate planning and there will be individuals and families who have approached retirement and estate planning based on existing rules.
“Now, the value of pension pots will be added to the total value of other assets and if over the IHT threshold of £325,000, aside from other exemptions, will be taxed in the same way.”
He said the change will cause a “fundamental shift” as at present it makes sense to use up your ISAs and savings before touching your pensions.
But now pensions will soon be at risk of an inheritance tax hit, pensions will likely be “accessed earlier”, Mr Ambery said.
Wealth firm Rathbones said the move could mean increase the number of estates liable for inheritance by almost a quarter.
Faye Church, senior financial planning director at the group, said: “Pensions used to be exempt from IHT, allowing people to pass them on unfettered, so it’s important for individuals to revisit their IHT plans now that the goalposts have been shifted.”
Other experts believe making pensions subject to inheritance tax could make the system fairer. Daniel McAfee, head of Legal Operations at Lawhive, said: “Residuary pension funds are currently a significant tax-efficient vehicle for passing wealth to beneficiaries, and their exemption from IHT can be seen as disproportionately benefiting wealthier individuals.
“Removing this exemption would align pension wealth more closely with other forms of inherited wealth, potentially increasing government revenue and addressing perceptions of inequality in the tax system.”
The Chancellor also set out that from April 2026, there will still be no inheritance tax to pay on the first £1million of combined business and agricultural assets.
For assets valued over £1million, there will be a 50 percent relief with the tax levied at an effective rate of 20 percent.
The changes to inheritance tax will add “new complexity” to estate planning, warned David Murray, head of Advice at abrdn Financial Planning.
He set out: “While the Chancellor has extended the threshold freeze for two years, the changes announced, including the addition of inherited pensions and business assets, will add a new complexity to estate planning and a higher tax bill for many.
“While these measures were an obvious target for the government, it raises concerns, particularly for those who have invested heavily into pensions to benefit from the IHT perks.
“Inheritance tax sparks strong feelings, and I’d always welcome ways to simplify the system. While we want to close potential loopholes in the rules, we also want to avoid unfairly penalising people with unexpected taxes.”
