In the event of death, IHT is charged on the value of assets that exceed a certain threshold. This IHT threshold, known as the ‘nil rate band’, is currently £325,000, and any assets above this amount will incur a tax charge of 40%. If you are married, or have a civil partner, you can pass your entire estate to your partner without inheritance tax.
There is also a main residence allowance which applies in addition to the existing nil rate band, but only if the deceased transfers the property that was previously their home, to their direct descendants (for example, their children or grandchildren). The current residential nil rate band is £175,000, having been increased to this limit in April 2020.
The main IHT threshold has been frozen at this level since 2009, and both this limit and the zero-rate main residence limit will remain at £325,000 and £175,000 respectively until April 2031.
Under current rules, your pension is usually not considered part of your taxable estate after death. However, your beneficiaries may still be subject to income tax when they access pension funds, and the amount of tax they pay depends on your age at death.
If you die after age 75, any withdrawals made by your beneficiaries will generally be taxed at their marginal income tax rate. This means that if they are basic rate taxpayers, they will pay 20%, while higher and additional rate taxpayers will pay more.
If you die before the age of 75, your beneficiaries can usually take your pension savings tax-free, either as a lump sum or as income, provided the funds are channeled through a registered pension scheme.
The rules change from April 2027 when pensions will be brought into the scope of inheritance tax. Potential pension funds targeted by the current inheritance tax proposal include defined contribution benefits paid as income to dependents via annuities or through withdrawals and defined benefit pension benefits as well as death benefits.
Mike Ambery, director of retirement savings at Standard Life, part of the Phoenix Group, said: “Carefully thought out implementation and clarity will be key, perhaps most notably in the case of unmarried couples who may be at a disadvantage.
“This is because the exclusion of married couples from IHT means married couples and civil partners are allowed to pass on their inheritance to their partners tax-free when they die, but benefits paid to unmarried partners may be subject to IHT charges. Now that pensions are brought into the ambit of IHT, surviving unmarried partners will have less income and therefore have a lower standard of living in retirement.”
You can read more about how inheritance tax rules currently work in our guide What is inheritance tax?
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