What the upcoming IHT changes mean for couples

As things stand, Inheritance Tax (IHT) is not payable on pension funds that have a monetary value at the date of death. But things are about to change. From April 2027, these so called ‘unused funds’ will be included in an individual’s taxable estate when they die and could affect your IHT bill.

Apart from property, the biggest asset for most people is their pension fund. This change will certainly have financial consequences for many who were hoping to pass on their assets without paying Inheritance Tax. It is worth noting, however, that Final Salary Occupational Pension Schemes will remain exempt from these changes. (If you would like a more detailed explanation of the changes, please read this article here.)

It is unmarried couples (including those not in a civil partnership) who could be especially vulnerable since IHT will be payable on first death. A formerly high-earning deceased partner with a substantial pension pot could leave the survivor with a very large IHT bill to pay before they can take possession of the deceased’s assets. IHT must be paid by the end of the sixth month after the date of death.

In addition to this, where a married couple’s assets are currently below £2m, they still benefit from the £175,000 Residence Nil Rate Band (RNRB) if they have descendants to pass their property on to after they die. With the inclusion of unused pensions, any estate value above £2m will begin to lose entitlement to RNRB. An estate valued above £2.7m will lose entitlement to RNRB completely. This works out at an extra £140,000’s worth of IHT payable per person.

So, as a couple – married or not – what can you do about this? The key to avoid being hit with a much larger than expected IHT bill is to address any issues early. And there is still plenty of time to make changes, which could save individuals and couples thousands of pounds in Inheritance Tax. Strategies might include making lifetime gifts to children, using Whole of Life Assurance to pay an IHT bill, smart use of lifetime annuities for some pension funds and a host of other options. As always, it’s all about having a plan, using holistic financial planning methods to determine the most suited approach.

If you would like to take a closer look at your estate and the IHT implications, please do get in touch. We would be happy to discuss your options with you.