Chancellor Rachel Reeves announced a huge tax-system update (part of a 40-billion pound budget plan) that will make life harder for inheritors
The new rules say that from 27ʼ pensions will count towards inheritance tax calculations; which creates a complex tax-trap for many families. Currently pensions stay outside of inheritance calculations but this tax-free benefit will soon end
A real-world example shows how the math works out: take a 2-million pound estate with no pension – the tax would be around 400k leaving 1.6-million for the family However when you add a 700k pension to this same estate the family gets just 60k more due to losing various tax benefits including:
- residence nil-rate band benefits
- basic inheritance allowances
- high-rate income tax effects
Chris Etherington from RSM points out this creates a bear-trap for taxpayers: “The tax system is full of complexities that can result in penal effective tax rates being applied in certain circumstances; and this is another one for people to watch out for“
The changes dont leave much room for planning – when combining inheritance tax and income tax some families could face an effective 91% tax rate on inherited pension funds