This is one of those blogs I have debated writing. The subject is not easy and it is emotive.
When it was announced that pensions would be liable to inheritance tax from 6th April 2027, I expected there to be a serious reaction to such a hard deadline.
The problem with not phasing in such a monumentous change is that you create a cliff edge that some people will jump off.
And so it came to pass, that we have started to see the first cases of terminally ill people refusing treatment to accelerate their death ahead of this deadline.
To most of us this seems an extreme reaction, but consider this. If you have six months to live without treatment or twelve months with treatment, with the latter costing your children £200,000 what do you do? You are pushed by this law change into valuing your own remaining days on this planet. Is six months worth £200,000?
This is the hard calculation that older people with pensions will start to face in the remaining months of this tax year.
Someone with a £500,000 pension fund who dies on or before 5th April 2027 will pass that amount to their children free from inheritance tax. If they live until the 6th April 2027 they will only pass on £300,000.
We can talk in money terms here but actually most people will work in ‘what that money will buy my son and daughter’. £100,000 for an adult child might pay off a mortgage, allow them to quit that job they hate or go on that once in a lifetime holiday they always dreamt of. That is the true cost of a sudden change like this.
This decision becomes even harder when your spouse is still alive. Gift it to them on death and they will almost certainly live beyond this deadline. Give it to the children to avoid the tax and you risk impoverishing your husband/wife. Given the numbers involved some couples will be doing the difficult sums to work out if the survivor can survive on cash and the equity in the property.
We can debate whether this tax change is right or not (we are just going back to the tax position of a decade ago), but it creates real issues when taxpayers have been running their finances a certain way for a decade of their retirement and then the rug gets pulled. Many of our clients have been spending every penny they have, apart from their pension fund, on the basis that the agreement with the government was that this wouldn’t be taxed to IHT. In some cases they had spent and gifted themselves down below the IHT thresholds as £1m of property and all pensions were exempt, only to find that with the stroke of the chancellor’s pen they are back to being taxed again.
Tax changes like this can be phased in or brought in immediately in the budget in which they are announced (October 2024 for this one), by doing neither of these, this chancellor has created this two and a half year period where the elderly feel as though a reverse sword of Damocles is hanging over their heads.
We can’t change the law, but we are helping clients to plan the draining down of their pension funds (we didn’t even mention that pensions are now double taxed for the children of older retirees) for spending or gifting, pension beneficiary planning and wider inheritance tax planning.
Altor Wealth advises clients from our office in Hook, across Hampshire, Surrey, Berkshire, Sussex and Kent, and throughout the UK using the latest technology.