Inheritance tax nil-rate bands were frozen at existing levels until April 2026 in the recent Budget, however, with the Government’s Tax Day approaching, there may still be changes set to take place. Hot on the heels of the early March Budget, the Government is set to publish a range of tax consultations and calls for evidence on March 23. This is part of the specific tax administration day the Government has set aside this year, independent of the Budget announcements.
With Inheritance Tax heavily scrutinised in the past, there has been the suggestion the levy could be on the list for Mr Sunak to review.
Steven Cameron, Pensions Director at Aegon, provided further insight ahead of the all-important day.
He said: “The Chancellor might be looking to increase rates of, or reduce exemptions from, Inheritance Tax (IHT).
“The OTS has published two reports making recommendations aimed at simplifying IHT including around gifts, while an All Parliamentary Group has also published a paper with more radical proposals calling for a complete overhaul of IHT.
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Mr Cameron continued: “Death benefits from pensions are currently typically paid at the discretion of trustees or schemes administrators and are free of IHT.
“When saving in a pension, the vast majority of people are doing so to provide a retirement income, rather than to pass on an inheritance.
“Bringing accumulated pension funds or ‘death benefits’ into an individual’s taxable estate of death would seem particularly harsh and unjustified.
“We need to encourage people to save more into pensions, so creating a possible tax liability for ‘good behaviour’ would be highly counterproductive.”
Inheritance Tax currently sits at 40 percent of a person’s estate which falls above a particular threshold.
This threshold is usually £325,000, but can vary dependent on a person’s circumstances.
There are, of course, exemptions which currently exist which could mean people can reduce their IHT bill.
However, these could potentially be under threat in some form in the future, experts have previously stated.
Mr Cameron concluded by looking at pension freedoms rules, widely welcomed when first introduced.
He examined and analysed how changes to Inheritance Tax could potentially impact the status quo.
Mr Cameron said: “The pension freedoms introduced around six years ago, give people more options on how to use their defined contribution pension pot to generate a flexible income through retirement.
“An increasing number are keeping their fund invested and ‘drawing down’ a flexible income with any funds remaining on death passed to a beneficiary.
“If death benefits here were brought within IHT, it would encourage individuals to avoid leaving money in their fund and instead to take more income sooner, increasing the risk of them running out of money while still alive and well.
“This would undermine the whole concept of pension freedoms.”