Do you pay Inheritance Tax on pensions?
Currently, if you die before the age of 75 and you have a big, untouched pension pot, you can leave that to your beneficiaries Inheritance tax free. As of April 2027, that is no longer going to be the case. For the purposes of Inheritance Tax, pension pots are going to be included in your estate.
If you are single, your estate, including your pensions, are going to be taxed at 40% on your assets above £500,000 if you own a property. If you are a couple, tax will be paid on second death on combined assets over £1m (if you own home). If you don’t own a home, it is £325,000 and £650,000 respectively.
If you die after the age of 75, the remainder of your pension pot will go to your nominated beneficiary, but they may only receive 60% of the pot rather than the full 100% once the Inheritance Tax is paid from it.
Are there any tax reliefs available on Inheritance Tax?
Previously, there were various reliefs available against Inheritance Tax, but these have been restricted quite dramatically. Historically, farm owners received 100% Inheritance Tax relief on death on the agricultural value of the farm. Owners of trading businesses also received 100% relief on trading assets, up to an unlimited value.
This is now being restricted. Agricultural assets and business assets are being combined, and a 100% tax relief offered up to £1m. Thereafter, it is 50% on assets above £1m. Effectively, this means you will be paying a tax rate of 20% on combined assets over £1m.
Do any additional assets qualify for Inheritance Tax relief?
Agricultural property assets have been expanded to include environmentally managed land.
Estate planning and Capital Gains Tax
Currently, people often try to give away their assets before they die so they do not become subject to Inheritance Tax. If the asset is given away seven years before you die, the value of it is not added back into your estate for Inheritance Tax purposes.
However, if it is a chargeable asset, such as an investment property or shares that have increased in value, then you would be taxed on the profit that you have made on that asset in the form of Capital Gains Tax. The lower tax rate for this is 18%, the higher tax rate is 24%.
Are there any tax reliefs available on Capital Gains Tax?
Many of the reliefs previously available on Capital Gains Tax will still be available, but the rates are changing. For Business Asset Disposal relief, an individual must have a minimum of 5% of an unlisted or AIM listed trading company. Previously, they would have paid 10% tax on their gains, but this has been increased in the latest Budget. As of April 2025, the rate will be increasing to 14%. It will go up again in 2026 to 18%, bringing it in line with the lower Capital Gains Tax rate of 18%. If an individual qualifies for this relief, the maximum they will pay is 18% – it is not forecast to increase again to 24% (the higher rate Capital Gains Tax).
What about investors who hold a shareholding in a trading unlisted or aim listed company?
Investors’ Relief is available to those who have purchased shares in an unlisted or aim listed trading company but does not actually work for the business themselves. Previously, this was capped at £10m but it has been reduced to £1m in the latest Budget.
Conclusion
It is safe to say that the advantages someone might have gained from keeping investments within pension pots, investing in farmland or business properties, investing in shares of either listed or non-listed companies have all been substantially reduced. Careful estate planning is needed to take advantage of the reliefs that are still available and new opportunities may need to be sought to invest cash in a more tax efficient way.
If you need help with estate planning or understanding the new rules around Inheritance Tax or Capital Gains Tax, speak to one of our expert Personal Tax lawyers on +44 (0)3333 231 580 or get in touch by email.
