Can Married Couples Inherit Pension Pots Tax-Free After the Budget Changes?
Can Married Couples Inherit Pension Pots Tax-Free After the Budget Changes?
Recent changes in the Autumn Budget have raised many questions about the tax implications for married couples who inherit pension pots. Here’s what you need to know:
Key Changes Effective April 2027
Starting from April 2027, the way pension wealth is treated for inheritance tax purposes will change. Previously, defined contribution (DC) pensions were excluded from inheritance tax calculations. Under the new rules, certain unspent DC pension balances and lump-sum death benefits from defined benefit or defined contribution schemes will now count towards the value of the estate.
Current Inheritance Tax Allowances
Before delving into the impact of the Budget changes, it's important to understand the basic inheritance tax framework, which remains unchanged:
Nil Rate Band: Each individual has a £325,000 tax-free allowance. This allowance will stay fixed until at least 2030.
Transferable Allowance: Any unused portion of the nil rate band can be transferred to a surviving spouse, effectively doubling the allowance for a couple to £650,000.
Residence Nil Rate Band: If you pass your main home to direct descendants, you get an additional £175,000 per person. This means a couple could benefit from a combined allowance of £1 million.
Spouse Transfers: Assets passed to a surviving spouse remain inheritance tax-free, although this does not apply to unmarried partners.
How the Changes Impact Inherited Pensions
Even with the new rules, if you leave an unused DC pension to your spouse, it remains exempt from inheritance tax. However, your spouse will pay income tax on any pension withdrawals at their marginal tax rate.
When your spouse eventually passes away, their estate—including the remaining pension balance—will be assessed for inheritance tax. This will be calculated using any remaining allowances. The new process, however, adds complexity.
Navigating the New System
Under the updated system, personal representatives handling the estate must gather detailed information from all relevant pension schemes. This includes assessing the value of the pension and identifying beneficiaries. Representatives will need to use an online HMRC calculator to determine the inheritance tax due, which will then be split between pension providers. Only once the tax is paid can the remaining funds be released to beneficiaries.
This process is expected to be cumbersome and could cause delays, especially if pension administrators are slow to respond. With the new rules, it’s vital to be prepared for potential administrative challenges.
Looking Forward
There is still time for further consultation and refinement of these rules before their implementation in 2027. Ensuring that the process is manageable and efficient will be crucial, as families already face significant emotional and logistical challenges when handling a loved one's estate.
