IHT and Pensions: your questions answered

In September, we had the pleasure of hosting two IHT and pensions webinars with Lauren Codd and Paresh Valji, Chartered Financial Planners at Attivo.

With significant changes to Inheritance Tax (IHT) drawing closer, many individuals and families are asking what the new rules could mean for them and what steps they may be able to take to reduce the potential impact.

During the sessions, we received lots of thoughtful questions from attendees. We have answered some of the key questions below to help clarify the changes and what they could mean for your estate planning.

Your questions about: Pensions and IHT

Can pension funds be passed on to beneficiaries without incurring IHT?

This is currently the case for the majority of pensions, but from April 2027, pensions will fall into the scope of IHT. Assets can pass between spouses and civil partners IHT-free, and this will be the case for pensions also. So, from April 2027, leaving a pension to a spouse or civil partner will be IHT-free, but leaving it to other loved ones will result in an assessment for IHT.

How much income tax would my children pay on my pension if I die before age 75?

As long as the pension is paid in two years and (where relevant) doesn’t exceed their available Lump Sum and Death Benefit Allowance (LSDBA), children will inherit this income tax-free. However, from April 2027 it will be assessed against IHT first.

If I die before my wife and my pension is transferred to her, would it be subject to IHT at that point?

No – transfer of assets between spouses and civil partners on death remain IHT-free. This will be the case for pensions as well.

Can I leave my pension in trust for my children?

Yes; however, there are considerations and complexities to be aware of, which we would recommend discussing with a financial planner. After April 2027, the pension will still be assessed for IHT before passing into the trust.

Does it matter whether a SIPP is in drawdown for Inheritance Tax purposes?

No. Whether the SIPP is in drawdown or has not yet been accessed makes no difference. Any remaining funds could still be subject to IHT.

Which pensions are affected by the IHT changes: defined benefit or defined contribution pensions? 

The proposed changes are expected to affect both defined benefit and defined contribution pensions. While defined contribution pensions are likely to be most significantly impacted, some defined benefit schemes may also be affected where death benefits form part of the member’s estate for IHT purposes. The extent of the impact will depend on the specific scheme rules and benefits available.

Would guaranteed payments from an annuity, such as a five-year guarantee, fall within the scope of IHT?

Potentially, yes. If an annuity includes a death benefit or guaranteed payment period, an element of IHT may apply. HMRC uses a calculation to determine the value of those benefits, so this would need to be considered on a case-by-case basis. 

Would now be a good time to take tax-free cash from a pension because of the forthcoming IHT changes? 

This depends on the individual’s circumstances. If the money is withdrawn but remains in a bank account, it will still form part of the estate. Simply moving money from a pension to a bank account may therefore make no difference for IHT purposes. The money would need to be spent, gifted or used as part of a wider planning strategy for the withdrawal to potentially reduce the estate. We would recommend speaking to a financial planner or getting in touch with us at Attivo before taking any action.

Would tax-free cash taken from a pension count as surplus income?

A tax-free cash lump sum would typically be treated as capital rather than income. However, if pension withdrawals were structured as regular income, they could potentially be treated as surplus income, depending on the circumstances. 

Your questions about: Allowances, spouses and beneficiaries

If I am married and my direct descendants are not related to my spouse, how does the Nil-rate band work?

The answer here will depend on if you have a Will. It doesn’t matter if your spouse and children are related or not.

If you have a Will:

Your assets will be distributed per the terms of your Will. If this is 100% to your spouse, the Nil-rate band is not used, and so your spouse will inherit your unused Nil-rate band.

However, as is often the case with second marriages, provision is made for both spouse and children in the Will. Two common scenarios are outlined below:

• You leave a life interest to your spouse (for example, the right to live in a home, any income your investments generate, and so on) with your children inheriting anything after your spouse has died.
  This creates an Immediate Post Death Interest (IPDI) Trust. For the sake of IHT and the Nil-rate band, the assets are treated as though they have passed to your spouse and they inherit your Nil-rate band in full (assuming a separate provision isn’t also left to the children, as in the next example).
  The assets are then assessed against IHT on your spouse’s death before passing to your children in line with the terms of the trust.
• You leave a specific percentage or monetary amount to your spouse and children. In this case, any assets passing to your children will use your Nil-rate band.
  If this amount is over £325,000, your Nil-rate band is fully used and so there is no unused part of this for your spouse to inherit. If this is amount is less than £325,000, the unused percentage of your Nil-rate band passes to your spouse.From April 2027, this includes any part of your pension passing on to your children. The assets passing to your spouse still pass on to them IHT free.

If you do not have a Will:

This is known as dying intestate, and your assets will pass on in line with the rules of intestacy. In England and Wales, if you are married with children, your spouse is entitled to all your personal property and belongings, the first £322,000 of your assets and 50% of your remaining estate. The remaining 50% of your estate passes to your children. This works differently in Scotland. The Nil-rate band works the same as in the previous example.

Pensions are distributed based on the expression of wish form, rather than your Will/the rules of intestacy, so it is important you nominate who you want to inherit your pension. The way Nil-rate bands work in relation to pensions from April 2027 is the same as for your other assets.

Having an up-to-date Will and expression of wish / nomination of beneficiary form for your pension can make effective use of your spousal exemption and Nil-rate band.

What should I be aware of if I am single?

You can leave your assets to any person, via your expression of wish/nomination of beneficiary form for your pension, and via your Will for your other assets. You are still entitled to the Nil-rate band for all assets, and if you have a main residence and direct descendants, will still be able to claim the residence Nil-rate band. The difference is that you do not have the option to utilise IHT transfers that benefit spouses and civil partners if they leave assets to each other.

Is the £3,000 annual gifting allowance per person?

Yes. The allowance is £3,000 per person, so a married couple could gift £6,000 between them each tax year. If neither person used their allowance in the previous tax year, they could carry it forward and potentially gift £12,000 between them initially, followed by £3,000 each in subsequent years.

Your questions about: Trusts, bonds and planning structures

In the Margaret case study, is the £2,000 she takes from the trust taxable?

In the example used, Margaret set up an investment bond. With an investment bond, you can usually withdraw up to 5% of the original investment amount each year on a tax-deferred basis. In this example, she is not paying income tax on those withdrawals for the first 20 years.

What type of investment bond was used in the Margaret case study?

An offshore investment bond.

Are there ongoing costs for managing trusts?

Trustees have ongoing responsibilities. If they are not experts in areas such as tax or investments, they should seek professional advice. This means there may be ongoing costs for accountants, financial planning and potentially legal advice, depending on how the trust is managed and whether any changes are needed. If you are using a professional trustee, this could also incur fees.

Is a whole-of-life policy written in trust managed by trustees, what does it protect, and does it remain part of the estate?

Whole-of-life insurance can be arranged to help cover an IHT liability. If the policy is written in trust, it will generally sit outside the estate immediately, subject to the relevant conditions. 

The trustees, who may be trusted family members such as a spouse or children, administer the policy proceeds after death. The money can then be passed to the beneficiaries and used to help pay the IHT bill, with any remaining amount distributed to them. 

What happens if premiums on a joint whole-of-life policy cannot be maintained before the second death?

If the premiums stop, the whole-of-life cover would generally come to an end. There would usually be no policy value or payout returned. 

Are Premium Bonds subject to IHT?

Yes, Premium Bonds do not receive any special exemption from IHT. If the overall estate exceeds the available nil-rate bands and allowances, the value of the Premium Bonds could be subject to IHT. 

Your questions about: Gifting and charitable giving

What is the current annual gifting limit?

Every individual has an annual gift exemption of £3,000. If you did not use your allowance in the previous tax year, you may be able to carry it forward and gift up to £6,000. However, this only applies to one unused year. The allowance applies to you as an individual, so you can choose how to distribute it, for example £3,000 to one person, £1,500 to two people, or £1,000 to three people. Amounts above the available exemption may remain in your estate for seven years.

If I leave money to charity from my estate, will it reduce my IHT liability?

Gifts to UK-registered charities are generally free from IHT. If you give to charity during your lifetime, that money does not usually remain in your estate or fall within the seven-year rule. If you leave money to charity in your Will, that gift is also IHT free. In addition, if you leave more than 10% of your net estate to charity, the IHT rate on the rest of your taxable estate may reduce from 40% to 36%. This can help reduce the IHT due, while directing more of your estate to a cause you care about rather than to HMRC.

The FCA does not regulate IHT planning services. Tax treatment is based on individual circumstances and may be subject to change in the future.

What is the maximum IHT reduction available through charitable giving?

There is no cap – 100% of gifts to UK registered charities are exempt from IHT.

Should we keep records of things we have paid for on behalf of family members, such as holidays, white goods or other financial support?

Technically, yes, as these payments may be treated as gifts. It is important to keep records of all gifts that you make, as this can help you answer any questions HMRC may raise when reviewing bank statements. 

Your questions about: Tax changes and future legislation

Is there any indication tax-free cash rules could change in the next Budget?

Any talk about this is purely speculation at this point (Sept 2026).

If tax-free cash rules change, would the change take effect immediately?

Speculation around tax changes often happens ahead of major fiscal events, and this is something we have seen repeatedly in recent years. The key point is not to act on speculation alone, as rumoured changes do not always come into effect. A good financial plan should be reviewed regularly and adjusted if confirmed changes are announced, rather than changed in response to rumours.

Pensions and pension legislation are exceptionally complex. As such we rarely see immediate changes take place with pensions as consultations and legislative changes are required.

What happens if a future government reverses the IHT changes to unused pensions?

Any significant changes to legislation, such as a reversal to already implemented or announced changes, should prompt a review of your financial plan. If appropriate to your circumstances, the pension may once again become the best way to pass your assets on to loved ones IHT free.

Which is higher: Capital Gains Tax or Inheritance Tax?

CGT and IHT are both entirely separate taxes, so any comparisons between the two should be considered carefully. It’s also important to remember that rates are subject to change. Currently, IHT stands at 40%, and the maximum rate on CGT is 24%, for higher and additional rate tax payers, making IHT the higher of the two.  

Your questions about: Advice costs and ongoing support

In the Margaret case study, what would it have cost to set up the planning?

For those looking to proceed with IHT planning advice through Attivo, our initial upfront fee starts at £4,500. In the Margaret case study, the planning shown resulted in a potential IHT saving of around £280,000, as well as significantly more assets being left to her beneficiaries. This demonstrates how the cost of advice may be outweighed by the long-term benefits of putting an appropriate plan in place. However, it’s important to note that this is just an example, and actual outcomes will depend on your individual circumstances, market conditions, charges, fees and tax treatment.

Would there be an additional charge if future legislation affects the advice?

This would depend on your circumstances and what adjustment to your financial plan was needed – we offer a range of services within our ongoing advice service at Attivo that may cover any adjustments that are needed. However, if there were significant adjustments needed to your financial plan, an additional charge may be payable.

Got a question about IHT and pensions that hasn’t been answered here?

Arrange your free, no-obligation consultation with our team today for an initial discussion, and to see how we could support you with IHT and estate planning going forward.