IHT on Pension Pots after April 2027

garybaldy

What are the implications for Inheritance Tax of leaving part of your pension pot(s) to someone other than your spouse or civil partner?

For example: A married man or woman has a £400K pension pot and dies before their partner. As I understand it, if the entire pot was left to their spouse, IHT would automatically transfer and not be calculated until the spouse died.

However, what would happen if the pension pot was split 50% to the spouse and the remainder between each of their two adult children (each child receiving £100K)?

Would the £200K of pension bequeathed to the children be subject to IHT at the first death, or does it reduce the IHT allowance that would be applied to their spouse's estate when they die?

squirrelpie

I don't think this has anything to do with topping up your state pension. I've asked for it to be moved.

webmasterpolo

My understanding is there would no IHT due in that example as the allowance is 325k and the 200k given outside of the marriage is under that. If it was a gift of 500k for example to the children then it is over the 325k and liable to IHT.

MrTrendingsheet

Webmasterpolo, that's not quite right. The £325k nil rate band applies to the whole estate, not just the bit going to non-spouses, so you can't just look at the £200k to the kids in isolation.

What actually happens from April 2027 is the pension stops being its own IHT-free wrapper and gets lumped in with everything else. In your example OP, the half going to your spouse is still fully exempt (spouse exemption is unlimited). The £200k to the kids gets added to the rest of the estate and uses up the £325k NRB plus up to £175k residence NRB if the house passes to them. So whether there's any IHT depends on the size of the rest of the estate, not the pension split.

The bit people often miss: if you die after 75, the kids pay IHT on the pot AND income tax when they draw it. For a higher rate heir that's an effective rate of over 64%. Plenty of advisers are now saying spend the pension first, leave the ISA and house behind.

DRS1

https://forums.moneysavingexpert.com/discussion/6668456/iht-on-pension-pots-after-april-2027

What is the rest of the estate worth and where is it going? You aggregate the pensions and the free estate.

I see someone has beaten me to it with a fuller post.

squirrelpie

Maybe leave it all to the spouse and trust them to give the £100k to each child as a potentially exempt gift? That's assuming there's some reason the person who dies doesn't want to give the money before they die, which would be the simplest choice I think.