Inheritance Tax
Rates
The IHT nil rate band has been fixed at £325,000 since 6 April 2009. Chancellor Reeves extended this freeze to the end of 2030/31. Holding the threshold at the same amount for 22 years will bring far more people into the scope of the tax.
The £175,000 ‘residential nil rate band enhancement’ on death transfers can reduce the IHT impact where it is available. A married couple may be able to leave up to £1 million free of IHT to their direct descendants (£325,000 plus £175,000 from each parent), but the rules are complicated, and the change to pension benefits described below increases the importance of proper IHT planning.
Unused pension benefits
Historically, it has been standard IHT planning to write death benefits payable from pension schemes into trust for one or more nominated beneficiaries (usually family members). Under current rules, this puts them outside the IHT net if the policyholder dies. In practice, the scheme trustees are very likely to follow any guidance received from the member while they were alive, usually given by way of a completed nomination form.
As previously legislated, for deaths on or after 6 April 2027, unused pension funds (whether or not written into trust) will usually be included in the deceased’s estate for IHT purposes. Due to the interaction with the income tax rules for those receiving benefits from such funds, this can lead to very high effective marginal tax rates.
It is important that anyone who might be affected by these changes takes specialist advice, including reviewing wills and reconsidering their overall retirement planning strategy.