Inheritance Tax pension changes

Inheritance Tax pension changes

What they mean for GPs and their practice

The Chancellor announced big changes to Pensions in the October Budget last year, but what does it mean for GPs, their families and their practice? 

The current rules 

Currently, pensions are outside the scope of Inheritance Tax. This has therefore incentivised a lot of people to contribute to their pensions as a tax effective way to not only grow but pass on wealth through the generations.  

Changes to the rules 

However, from 6 April 2027, the value of unused private pensions will be brought into account for Inheritance Tax purposes. This means that the value of the unused pension will be added to the estate of the deceased, with any exemptions like the Nil Rate Band (the Inheritance Tax free allowance which is currently £325,000) being applied proportionately between assets held by the deceased and those held in the pension.  

Any Inheritance Tax apportioned to the value of the pension will then be paid from the pension funds. 

What this means for the NHS pension scheme 

For those in the NHS pension scheme with defined benefits, there will be no changes to this and the value of any undrawn pension will not be taken into consideration for Inheritance Tax purposes. 

What this means for other pension provisions 

However, if GPs have contributed (or are still contributing to) private pensions, then these will most likely be brought into account for Inheritance Tax purposes from 6 April 2027. 

The tax benefits available on pensions contributions, as well as the income tax and capital gains tax free environment for assets once in a pension, remain attractive. It can therefore be difficult to reconcile whether or not contributions to private pensions should continue to be made. That being said, the aim of the changes to the rules is to encourage people to use their pensions for their intended purpose, in retirement, and in that regard these tax benefits are invaluable in helping to accrue a healthy retirement fund.  

Aside from the immediate question of whether or not to continue to contribute to a private pension, it is important to also review any nominations that may be in place for such pensions. It is understood that spouse exemption will apply to the value of a private pension passing to a spouse. However, whether or not this is appropriate will depend on the individual’s circumstances.  

For example, if a surviving spouse is unlikely to draw on the pension and it remains unused on their death, then Inheritance Tax will be calculated on the value at that time. If the surviving spouse is over the age of 75, then any benefit then drawn from the pension by their beneficiaries post death will be subject to income tax at the beneficiaries’ marginal income tax rates (which could be up to 45%, on top of the Inheritance Tax already paid at 40%!). 

Wider considerations for pensions 

Whilst this may not impact all GPs, it could be a considerable issue for older family members who may not yet be aware of the implications of this for their estates (particularly for those over 75 years old in light of the income tax charges on beneficiaries as mentioned above). 

It is important to be aware that for anyone looking to mitigate their exposure to Inheritance Tax by withdrawing funds from their pension during lifetime, this will be subject to income tax at their marginal rate.  

However, any such income would likely be treated as excess income which is something that can then be gifted free of Inheritance Tax, without the need to survive for 7 years like most gifts. Such pension withdrawals could also be used to fund life insurance taken out to pay the Inheritance Tax liability on death, if appropriate. 

Call to action 

Reviewing any private pensions (and raising this as a possible issue for other family members) is an important first step to understand how the changes may impact your estate and what steps can be taken to plan effectively and tax efficiently in the circumstances.  

Our private client team works closely with GPs and medical professionals to ensure succussion planning for the practice and the people behind it is as appropriate and tax efficient as possible. Please feel free to contact us for a free no obligation initial discussion to see how he may be able to assist in light of the imminent changes to inheritance tax.