Autumn Budget 2024 – UK Inheritance Tax to Apply to UK Pensions

17 March, 2025

The UK Chancellor, Rachel Reeves, delivered one of the most talked about UK Budgets in years in October 2024. With the Labour government seeking to raise an additional £40Bn in tax, pensions looked like a likely place for the government to target. In the lead-up to the Budget, numerous potential changes to the UK’s pension regime were debated with many fearing that the UK’s 25% tax-free pension commencement lump sum could be abolished or at least reduced. Others debated whether the UK’s Lifetime Allowance may be reintroduced.

The good news is that many of the anticipated pension changes did not come to fruition.

However, one key change to pension taxation was announced in the Budget – from April 2027 most unused UK pension funds and death benefits will be included within the value of a person’s estate for UK inheritance tax (IHT) purposes. It is important to note that this would apply to US residents who have UK-based assets.

The policy intention behind this is a desire by the government to remove “a distortion which has led to pensions being used as a tax planning vehicle to transfer wealth rather than their original purpose to fund retirement”. This comes after the introduction of the pension freedoms in 2015 which removed a 55% tax charge on inherited pension funds, in certain cases, and the abolition of the Lifetime Allowance in April 2024.

What is UK IHT?

In the UK, IHT is a tax on a person’s estate (property, money, and possessions) at death. At a high level, it does not apply to an estate if either:

• The value of the estate is below the £325,000 threshold (the nil rate band (NRB)); or
• Everything above the £325,000 threshold is left to a spouse, civil partner or charity (see below regarding US residents).

The Chancellor confirmed that the NRB will remain frozen at £325,000 until 2030 and in fact, has not risen since 2009. The standard UK IHT rate is 40% and is only charged on the part of an estate above the NRB.

How could this apply to my UK pension?

The government issued a public consultation on the inclusion of UK-registered pensions for IHT on 30 October 2024. This consultation lists only two types of death benefit that would not be included in the value of a person’s estate from 6 April 2027 – a dependant’s pension paid by a defined benefit pension scheme; and payment of a pension fund to a qualifying charity.
Consequently, any UK-defined contribution/personal pension could be subject to IHT. At a very high level, for US residents, the NRB would be spread proportionately across any non-pension assets in the UK and the UK pension assets based on the relative size of their UK taxable amounts.

What is the status of these proposed changes – do I need to do anything now?

The above changes have been subject to a public consultation which closed on 22 January 2025. Many commentators have noted that issues identified in the consultation could bring changes to the scope of the policy. The next steps will be the government publishing both a formal response and draft legislation, which is expected “later in the year”. As we learn more about the government’s implementation, it will be important to confirm how these changes will impact US resident clients specifically.

Until we receive a formal response and draft legislation, we feel it is too early to advise fully on what (if any) changes to a person’s retirement planning for their UK pension should be. However, if you have been planning to put off drawing your UK pension to provide a tax-efficient inheritance for your beneficiaries, we would recommend speaking to your financial adviser so that this strategy can be reviewed.

If you have any questions about how these changes could impact your UK pension, please do not hesitate to contact Florin Pensions.