New Inheritance Tax rules being introduced by Chancellor Rachel Reeves are set to hammer certain UK families.
The Chancellor has put in place new rules to tax pensions as part of Inheritance Tax, starting from April 2027.
It will mean that pensions, such as private or workplace pensions, will be taxed as part of a person’s estate when they die and count towards Inheritance Tax threshold limits like cash and property does.
And according to financial experts, certain family types are set to be hit harder by the changes thanks to the way Inheritance Tax thresholds work and the allowances within them which are targeted at married couples with children.
Consumer Magazine Which? explains: “Calculations by investment platform Interactive Investor highlight how some people could face higher inheritance tax bills if they inherit from single parents, ‘blended families’ or unmarried partners, because key exemptions are not available.
“For example, those inheriting from an unmarried partner from April 2027 will face tax of £110,000, assuming an estate worth £600,000. Under previous rules they would not have paid any tax.
“Unmarried partners can only benefit from the deceased’s nil-rate band (£325,000) and not the £175,000 residence nil-rate band, as for this to apply the home must be left to direct descendants.”
Craig Rickman, personal finance expert at Interactive Investor, told Which?: ‘With inheritance tax rules changing and blended families becoming more common, more grieving family members may be left with a hefty tax burden upon receiving money or assets on death.
“Younger people might not be aware that the amount of tax they pay on inherited assets depends on factors outside their control, including their parents’ marital status. Some valuable inheritance tax-free allowances and exemptions don’t extend to unmarried couples.”
The fact that the tax-free allowances are frozen until at least 2031 will drag more estates into the net. The nil-rate band has been frozen at £325,000 since April 2009, while the residence nil-rate band (£175,000) was last increased in April 2020. The Office for Budget Responsibility (OBR) has calculated that around 67,000 families could face an Inheritance Tax bill in 2029-30, compared to just 27,800 estates in 2021-22.
HM Treasury said when the policy was announced: “This change has been introduced to prevent pension schemes from being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for their intended purpose of funding retirement.”