Treasury Plans: the chancellor announced in the Budgets that pensions will now pay the inheritance tax from April 2027
My husband died before the age of 75 and I inherited his Sipp, which has been transferred into my name.
I understand that since he died before the age of 75, I can withdraw the pension tax payment. Will this continue to be the case after April 2027?
I have never used the pension, which is quite considerable. What would you recommend I do with the funds now?
I had intended to leave the fund intact so I could pass it on to my son, but it appears that starting in 2027, when I die, he will have a huge tax bill, and the pension will be taxed twice, once at 40 percent. cent and then again at your marginal tax rate.
Inheritance tax must also be paid on the rest of my estate.
This is Money’s Tanya Jefferies responds: We have received many messages from readers about the plans announced in the Budget to make pensions subject to inheritance tax from April 2027.
This has disrupted many families’ plans to bequeath unspent funds to younger generations. And the wealthy could face a “double tax hit” on inherited pensions of up to 70.5 per cent under the new rules.
Our retirement expert Steve Webb responded to a question about whether married couples can still inherit pension funds tax-free after the budget changes.
Ray Black, chartered financial planner and boss of Money Minder, responded to another reader about whether it was a good idea now to start transferring £20,000 a year from a pension to an Isa.
He and other advisers have given a useful summary of the questions clients are bombarding them with following the Budget, including the issue of “double taxation” which you have raised here.
Below, an experienced financial advisor details the details of his own situation, where he has already inherited a tax-free pension and intends to pass it on to his child. She will explain the options you have now.
Michelle Holgate, Senior Financial Planner at RBC Brewin Dolphin, responds: While the Budget announced that pensions will lose their inheritance tax exempt status from April 6, 2027, clarity has yet to be given on the finer details of such legislation and implementation.
A consultation will take place over the coming months, allowing investors to make more informed decisions.
Michelle Holgate: It is likely that once the changes take effect, retirement plans of beneficiaries inherited before April 2027 will be subject to inheritance tax after the death of the current owner.
At the moment, there has been no immediate change to the way pension savings are treated.
Therefore, the beneficiary’s retirement funds are exempt from inheritance tax, and because your husband died before age 75, you can withdraw any amount from this plan without incurring income taxes.
There has been no indication as to how pension fund ‘beneficiary reduction’ plans inherited before April 2027 would be treated for inheritance tax purposes after this date.
However, they are likely to be subject to inheritance tax at the time of your death, as will any pension savings accumulated during your life.
We understand that the income tax rules would remain unchanged for beneficiaries after the pensions are no longer exempt from inheritance tax and therefore you may be able to continue the withdrawal free of income tax.
Likewise, if you die before the age of 75, your child will also be able to collect this tax free, although the inheritance tax will continue to be charged.
If the rules regarding income tax on withdrawals change to be taxable in full, at your highest marginal rate, then the best course of action is likely to be to withdraw all available funds within the beneficiary’s disposition and restructure your assets sooner. such changes occur.
What options could you consider?
If the rules change, you may want to consider using a variety of planning solutions.
1. Depending on your income needs, you may want to review your income strategy and incorporate withdrawal funds from different sources.
Different income strategies can allow you to optimize the use of tax relief, and spending money that will not be exempt from inheritance tax can help reduce the potential future tax bill in the event of your death.
2. You may want to consider passing on money and therefore a financial legacy to your child during your lifetime rather than when you die.
This could be done through direct donations. There are a variety of gift allowances available that allow for an immediate reduction of your estate for inheritance purposes, although some gifts may continue to form part of your estate for seven years.
3. Donating assets to trusts allows you to pass them on to family and friends during your lifetime and also upon death.
While this would not remove the amount withdrawn from the beneficiary’s disposal immediately from his estate, it would start the seven-year clock to reduce the inheritance tax payable in the future.
There are also trust options that can offer an immediate discount on some of the funds for inheritance tax purposes.
4. Reinvesting the money in a variety of different tax wrappers with different tax treatment on withdrawal can allow you to use the reliefs available to you and potentially reduce your overall tax on cash over time, to suit your own needs. or those of those. of your family.
This, however, does not change the current situation of inheritance. For example, you may be able to use Isa allowances with funds from the beneficiary’s retirement before the new legislation comes into force.
Where beneficiaries’ retirement funds may be subject to tax after April 2027, Isa withdrawals are tax-free.
Consideration could be given to reinvesting the funds into tax-advantaged schemes, such as business relief, which are exempt from inheritance tax (up to £1m from April 2026) after a two-year holding period.
This may offer other tax benefits, but they are high-risk strategies.
5. Financial advice to understand the risks, pros and cons of all options is paramount and therefore highly recommended.
As always, there is no one-size-fits-all solution when it comes to financial planning and the solutions most suitable for you will depend on your wider personal and financial circumstances.
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