The autumn budget was announced on the 30th October 2024 and whilst no change was made to the limit on tax free cash that can be taken from a pension fund new rules regarding pensions and Inheritance Tax were revealed.

The government opened a consultation with the pensions industry regarding inheritance tax on unused pensions on the 30th October 2024 which is due to close on the 22nd January 2025 and so anything in the consultation is subject to change. The information in this update is from the initial consultation document and therefore is also subject to change and should not be relied upon as the final rules.

Pensions and Inheritance Tax (IHT)

From the 6th April 2027 the value of any unused funds in a defined contribution pension scheme will be added to a persons estate to determine whether or not Inheritance Tax will be due.

On this date pension schemes will become liable for reporting and paying any Inheritance Tax due to HMRC for the pension schemes that they administer. The Personal Representative will be responsible for dealing with any other Inheritance Tax liability due from the estate of the deceased.

The payment deadline for settling any Inheritance Tax due will be 6 months after the end of the month in which the death occurs and so it will be crucial that we are told as soon as possible of a members death as failure to settle the liability due will result in interest accruing.

The spousal exemption which allows assets to be inherited free of Inheritance Tax will continue to exist and will include pensions from the 6th April 2027.

We will provide the Personal Representative with a valuation of the pension scheme and it will be their responsibility to calculate and inform us of how much of the Inheritance Tax nil rate band is apportioned to the pension scheme. We will then be responsible for reporting and paying the Inheritance Tax within the deadline.

The current pension death benefit rules will also continue to apply which does mean that if a member dies after the age of 75 any funds, after the payment of any inheritance tax, will be taxed at the beneficiaries marginal rate of tax.

Transfers to a Qualifying Recognised Overseas Pension Scheme (QROPS)

The budget also introduced a change in respect of transfers to a QROPS.

Previously an overseas transfer charge of 25% would apply if none of 5 specific conditions were met. With effect from the 30th October 2024 the government has removed one of the conditions. The condition removed is the QROPS receiving the transfer is established within the EEA or Gibraltar. This is the condition that a lot of clients rely on to ensure that they don’t have to pay the overseas transfer charge. There does still appear to be an exemption for individuals who are resident in the same country as that in which the QROPS receiving the transfer is established.

However, if the transfer was requested before the 30th October 2024 and is completed before the 30th April 2025 then the 25% tax charge will not apply.

About this document

This update is based on our understanding of the consultation document and every care has been taken to ensure that it is correct.  No responsibility to any third party is accepted if this information is used for any other purpose.  The legislation may change in the future.