Currently, unspent UK pension pots can be passed on tax-free, but from April 2027, most unused pension funds and death benefits will be included in the value of that person’s estate, which then may be subject to Inheritance Tax.
These changes have been introduced in the Autumn Budget 2024 and are part of the UK government’s aim to ‘deliver a fairer and less economically distorted tax treatment of inherited assets’.
Case Study
Let’s consider someone living overseas who still owns assets in the UK. At the time of their death at age 73, their UK-based estate consists of the following:
- Savings worth £50,000
- A home in the UK, being passed to their child, worth £400,000
- A defined contribution pension pot with £100,000 in it, with their child named as the beneficiary.
This gives a total UK estate value of £550,000.
Under Current Rules (pre-April 2027):
No Inheritance Tax (IHT) would be due on the estate. The pension could be inherited tax-free, and the remaining £450,000 (savings + home) falls within the individual’s £500,000 IHT allowance (£325,000 basic allowance plus the £175,000 residence nil-rate band for passing on a home to direct descendants).
Under the New Rules (effective April 2027):
The inclusion of pensions in the value of an estate means the full £550,000 is now assessed for IHT. While the total allowance remains £500,000, the additional £50,000 above the threshold would be subject to IHT at 40%, resulting in a tax bill of £20,000.
This highlights the significant impact of the rule change on estates, particularly for those overseas who may be unaware of how UK pension assets are treated under evolving tax laws.