New IHT Rules on Pensions Could Dramatically Increase Tax Liabilities
Radical changes to inheritance tax (IHT) rules announced in the 2024 Autumn Budget mean that pensions will be included in IHT calculations from 2027—potentially leaving six times more over-55s exposed to hefty tax bills.
According to analysis by wealth manager Quilter, one in five clients aged 55+ could face an IHT liability once pensions are factored in—a six-fold increase from current levels.
Why the Change? Frozen Thresholds & Expanding Tax Net
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The IHT nil-rate band remains frozen at £325,000, with an additional £175,000 residence allowance.
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With average property prices rising, even modest estates could now breach the £500,000 threshold when pensions are included.
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Roddy Munro, Quilter’s Head of Technical Sales, warns: “The scale of change is monumental. Traditional tax wrappers no longer offer the same protection.”
Financial Advisers Turn to Onshore Bonds & Trusts
With pensions losing their IHT shelter, advisers are increasingly recommending:
1. Onshore Bonds – A Tax-Efficient Alternative
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Tax-deferred growth: The bond provider pays tax at 20%, meaning no further tax is due unless withdrawals push the holder into a higher tax bracket.
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Easier trust management: No need to report annual income/gains to HMRC, simplifying administration.
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Flexible payouts: Beneficiaries can access funds without triggering immediate tax charges.
2. Discretionary Trusts – Ring-Fencing Wealth
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Assets placed in trust can fall outside the estate after seven years, reducing IHT exposure.
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Trustees control distributions, making it ideal for those hesitant about outright gifting.
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Potential charges: Initial IHT may apply if exceeding allowances, plus 10-yearly and exit fees.
Why Advisers Are Shifting Strategies
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Frozen tax allowances (CGT, dividends, pension tax-free cash) have eroded traditional planning tools.
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Quilter data shows onshore bond recommendations nearly tripled post-Budget.
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Shaun Moore, Quilter Financial Planner: “Bonds and trusts will be foundational for intergenerational wealth transfer in this new tax era.”
Key Considerations Before Proceeding
✔ Seek expert advice—trusts and bonds have complex rules.
✔ Weigh long-term costs—trust charges can add up over time.
✔ Assess flexibility needs—some solutions limit access to funds.
The Bottom Line
With pensions soon counting toward IHT, proactive planning is essential. Onshore bonds and trusts offer viable solutions, but expert guidance is crucial to avoid pitfalls.
Act now—before the 2027 changes take effect.
