From April 2027, the way pensions are treated for Inheritance Tax purposes is changing.
You may have already heard that the changes could result in more Inheritance Tax being payable. But could they also affect who receives what under your Will?
In this article, Wills & Tax specialist Holly Munro explains what the pension Inheritance Tax changes could mean for your existing Will and when it may be worth reviewing your arrangements.
What is Inheritance Tax?
Inheritance Tax is a tax that can be charged on the value of a person’s estate when they die, including their property, money and possessions.
Whether Inheritance Tax is payable depends on the value of the estate and any available allowances, exemptions and reliefs.
What is changing with pensions and Inheritance Tax in April 2027?
From 6th April 2027, most unused pension funds and pension death benefits will be included when calculating the value of a person’s estate for inheritance tax purposes.
Much of the discussion around the April 2027 pension Inheritance Tax changes has focused on whether families could face a larger Inheritance Tax bill.
However, there is another important point to consider.
Whilst the changes are primarily relevant to the Inheritance Tax calculation, they may also affect the operation of certain Will provisions which are linked to those calculations, such as charitable gifts or clauses designed to secure the reduced rate of Inheritance Tax.
If your Will contains charity gifts linked to the value of your estate for Inheritance Tax purposes, it may be worth reviewing it before the new rules take effect. To review your Will get in touch with our expert Wills & Tax Solicitors on 01202 499255.
Why could the pension Inheritance Tax changes affect my Will?
Many Wills include gifts or clauses that are linked to the value of an estate for Inheritance Tax purposes.
Common examples include:
- Gifts to charity
- Clauses designed to secure the reduced 36% rate of Inheritance Tax
There are several different ways you can leave money, property and other assets under a Will. You can read more about what you can leave in your Will in our dedicated article here.
When many existing Wills were prepared, pension funds did not form part of the estate for Inheritance Tax purposes.
From April 2027, that position will change for many pension arrangements.
This means the figures used to calculate charity gifts under your Will could be very different from those you had in mind when the Will was written.
What could the changes mean for charitable gifts in my Will?
One area where the changes could have an unexpected effect is charitable giving.
For example, your Will might leave a percentage of your estate to charity, with the remainder passing to your children or other beneficiaries.
Some Wills contain charitable gifts designed to help an estate qualify for the reduced 36% rate of Inheritance Tax. Broadly, the reduced rate may apply where the required amount of the estate is left to charity.
The rules relating to charitable gifts are not changing in April 2027. However, bringing pension assets into the Inheritance Tax calculation could change the value used to calculate a gift. This will depend on the wording of your Will and how the relevant tax calculations apply.
In some cases, this could mean more passes to charity than you originally intended, reducing the amount left to your other beneficiaries.
Our expert Wills & Tax team can help you understand these changes and ensure that you Will will still produce the outcome you want once the pension rules change. Get in touch on 01202 499255.
Are all pensions affected by the April 2027 changes?
No. The rules do not affect every pension or pension benefit in exactly the same way.
From 6th April 2027, most unused pension funds and pension death benefits will be brought into the estate for Inheritance Tax purposes, but there are exceptions.
For example, death-in-service benefits payable from a registered pension scheme are excluded. Certain dependant’s pensions and other pension-related benefits may also receive different treatment.
The effect of the April 2027 changes will therefore depend on:
- The type of pension arrangements you have
- The benefits payable when you die
- The value of your pension fund
- The wording of your Will
Therefore, it is important to look at your Will and pension arrangements together rather than considering each separately. Seeking legal advice on how these changes might affect your will can help ensure the outcome of your Will reflects your wishes.
Should I review my Will before the change to pensions and Inheritance Tax in April 2027?
It is particularly important to consider a review if you:
- Have a substantial pension fund
- Leave money or a percentage of your estate to charity in your Will
- Have a clause designed to qualify for the reduced 36% rate of Inheritance Tax
- Have not reviewed your Will for several years
The April 2027 changes are not only about whether your estate might pay more Inheritance Tax.
They could also change how much of your estate ultimately passes to the people and charities you have chosen to benefit from your Will.
Reviewing your Will does not necessarily mean you will need to change it. Reviewing your Will can give you reassurance that your existing arrangements will continue to work as you intended.
Specialist Wills & Tax Solicitors in Christchurch, Ringwood & Wimborne
If you have a substantial pension, charitable gifts, or percentage-based gifts in your Will, it may be worth checking that your existing arrangements will still work as you intended when the new Inheritance Tax rules come into effect.
Our experienced Wills & Tax team can review your Will and advise you in plain English whether the April 2027 pension changes could affect how your estate is distributed.
If you would like to speak to a member of our team or ask any questions, get in touch on 01202 499255 or by filling out the form at the top of this page.
We offer all new clients a free initial chat.
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