I’m 65 years old and worried about the new pension rules that say my pension pot will now be subject to inheritance tax when I die. This will take me well over the tax-free thresholds. How can I plan to ensure my family aren’t subject to a large inheritance tax bill when I die?
Laura Bywater, partner in the private client team at JMW Solicitors, says the Autumn Budget contained a surprise announcement that most unused pension funds and death benefits will be included within the value of an individual’s estate for inheritance tax (IHT) purposes from April 6 2027. This will have a significant impact on the attractiveness of pensions when planning and deciding how to pass estates to the next generation in a tax-efficient way.
In recent years, pension schemes have been increasingly used and marketed as a tax planning tool to transfer wealth free of IHT, rather than for their intended purpose of funding retirement. For this reason, many individuals have tended to structure retirement income to limit drawdown from pensions, instead prioritising spending down assets that would otherwise be liable to IHT.
The new rules mean that from 2027, most unused pension funds and death benefits will be included within the value of an individual’s estate for IHT purposes. The government said this change would only impact about 8 per cent of estates each year, but it would generate £640mn in extra revenue in the 2027-28 tax year, £1.35bn in 2028-29 and £1.46bn in 2029-30. A part of this increase will be attributable to the nil-rate band thresholds that have been frozen until 2030.
The details on how the transition to the new rules will take place has not yet been confirmed, as the government is consulting on the process and further details will be released after the consultation ends in January 2025.
The good news is that spouses and civil partners will still be able to inherit assets from one another without paying IHT and this includes pensions. It is only when pensions are left to beneficiaries other than a spouse or civil partner that they will be included in an estate for IHT purposes.
With your specific question in mind, here are some things to consider when structuring the rest of your assets to minimise inheritance tax liabilities.
First, if there is more than enough money to live on then you could focus on giving assets away during your lifetime. Gifts to individuals outright are still classed as potentially exempt transfers and fall out of account for IHT so long as the individual making the gift survives seven years. Therefore, you could withdraw your pension tax-free cash entitlement and gift it in the hope of surviving seven years.
You could also consider taking a higher level of income from your pension pot with a view to gifting some of this income away. As long as the gifts are regular and do not impact your usual standard of living, they could be covered by the “normal expenditure out of income” exemption and fall immediately outside your estate for IHT purposes.
Gifting into trust as opposed to gifting outright could also be considered. Trusts allow individuals to be appointed as trustees, allowing them to retain control over the assets gifted and providing protection for the trust beneficiaries by restricting access to the trust funds if there is good reason to do so.
My former partner has grumbled for years about paying the school fees for our two children. We were never married. I’m worried that he will stop paying the fees when VAT is introduced or try and remove them from the school altogether. Is there anything I can do to prevent this happening?
Natalie Lemonides, a partner in the family team at law firm RWK Goodman, says the first step is to talk things through with your former partner because there is a chance that your fears are ungrounded. If he confirms that he will stop paying the fees, you have several options depending on what is already agreed between you.
First, if a consent order is in place ordering your former partner to pay the school fees, you will need to make an application to enforce the order through the courts when he stops paying the fees. Alternatively, it may well be that your former partner goes ahead and makes an application to vary the order himself. For this to be successful, he will need to persuade the court that there are not the resources available to pay the fees.
Each case will be considered on its individual facts including the children’s educational and financial needs, the financial resources and capabilities of you both and the standard of living to which the children are accustomed. The fact they are currently settled in a private school will be relevant to the court’s decision.
If a consent order is not already in place, you could seek advice from a family solicitor on how to secure one. Alternatively, you have another option, which is to apply to a court for a school fees order that can force your former partner to continue paying the fees. A school fees order is really a type of maintenance order, which can always be varied both in terms of the amount to be paid and the duration of it. As before, the court will consider the factors mentioned above when deciding whether such an order is merited.
The court typically recognises the importance of maintaining continuity in education for children, particularly during critical examination years, such as GCSEs and A-levels. Therefore, if removing your children from their current school would negatively impact them, especially when financial adjustments could be made, the court is likely to favour maintaining the status quo. Another thing to bear in mind is that your former partner will require your consent to move your children from the school. If you do not provide consent, he will need to make a formal application seeking permission from the court.
Ideally, I would urge you and your former partner to be honest about what is affordable. It may be that your former partner will genuinely struggle to finance the increase in school fees. If this is the case, it may be that there are areas where you could make sacrifices.
If you can reach an agreement so that a consent order or school fees order can be drawn up and sealed by the court, this will save time and money on professional fees, as litigating is incredibly costly.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to money@ft.com.
Our next question
We’re interested in installing a heat pump, as our boiler probably only has a year of life left in it, but although we think we’ll stay in our house for at least another five years, our plans might change. Does a heat pump add value to a property? When would we start to see savings on our energy bills compared to installing another gas boiler? And what else do we need to consider?
