From April 2027, significant changes to the UK Inheritance Tax (IHT) concerning SIPPs will come into effect, as announced by the Chancellor in the recent Autumn Budget. Most SIPP funds will be included in estate values, potentially leading to 40% IHT on estates exceeding £325,000, plus additional income tax if the deceased was over 75.
The UK government anticipates increased IHT revenue as a result.
Here are the key changes:
● Inclusion of Unused Pension Funds in Estate Value: Most unused funds and death benefits in an inherited pension, including SIPPs, will be included in the value of a person’s estate for Inheritance Tax purposes. This means that large pension funds could push estates over the tax-free threshold, leading to significant tax liabilities for beneficiaries.
● Potential Double Taxation: Applying inheritance tax to SIPP pensions could lead to ‘double taxation’. Beneficiaries would have to pay 40% Inheritance Tax on any estate exceeding £325,000 and also income tax on any lump sums or income they receive from the unused pension if the deceased passed away after the age of 75. For example, on a £100 pension pot, a 40% Inheritance Tax would reduce it to £60, and an additional 45% income tax (highest tax bracket) would further reduce it.
● Tax-Free Allowance Remains Unchanged: The estate’s tax-free allowance, known as the nil-rate band (NRB), will stay at £325,000 until at least 2030. This doubles to £650,000 for married couples or civil partnerships.
● Consultation Ongoing: The exact details of how these changes will work are still being determined through a consultation process running until January 2025.
It’s crucial to note that these changes could significantly impact beneficiaries of SIPPs. It is advisable to stay updated on the outcomes of the consultation and consider potential estate planning strategies to mitigate the impact of these changes.