Pensioners across the country have been warned about an “inheritance tax” trap that could increase their current tax burden. According to experts, families across the country could face substantial tax burdens by 2030 due to an impending pension-related tax crackdown.
Currently, inheritance tax thresholds are frozen, meaning they do not rise to match inflation or increasing asset values. As homes, investments, and savings grow in value, more estates exceed these thresholds, leading to higher tax bills for families. However, in 2027, a major shift is expected. Pension pots will be included in estate calculations, reports This is Money.
Until now, pensions have often been exempt from inheritance tax, allowing families to pass them on with fewer tax burdens.
However, once these are incorporated, many more estates will fall within the inheritance tax net, significantly increasing tax liabilities for families receiving an inheritance.
At present, unspent pension funds are excluded from an individual’s estate when calculating inheritance tax.
However, beginning in April 2027—as outlined by Rachel Reeves in her Autumn Budget—the Government plans to include them. This shift could result in double taxation and impose rates as high as 67% on these unutilised funds.
Ian Dyall, head of estate planning at Evelyn Partners, told This is Money: “These imaginary but realistic case studies illustrate the inheritance tax liability impact of both asset value inflation against nil-rate bands that are frozen until at least 2030, and crucially the pensions rule change that is due to come into force at the start of the 2027/28 tax year.”
If you pass away before the age of 75, your pension beneficiaries can inherit the pot without facing income tax. However, if your death occurs after 75, they will have to pay income tax on any withdrawals from the inherited pension. Adding a 40 percent inheritance tax in this scenario could result in double taxation and exceptionally high marginal tax rates on those withdrawals.
Additionally, it is projected that roughly one in 10 estates will soon fall within the inheritance tax net, with the Treasury expected to collect an extra £14.3 billion between now and the 2029-30 tax year.
