The government’s recently announced changes to inheritance tax (IHT) policy will create “significant challenges” for families, London accountancy firm Wilson Wright has warned.

Chancellor, Rachel Reeves, announced in the Budget that unspent pension pots would be brought into scope of IHT from April 2027.

Wilson Wright private client tax partner, Neil Lancaster, said this change posed significant challenges for families: "While pensions were previously exempt from IHT considerations, families will now need to ensure they have sufficient liquidity to cover tax liabilities,” he stated.

“The expectation is that pensions will cover the IHT due, but this may not be practical depending on the assets held. Families may need to adjust their life cover policies to account for these potential liabilities linked to pension values."

Furthermore, the changes raised “pressing questions” regarding the use of gift receipts for distributing pension assets before death.

Lancaster cautioned against making hasty decisions, stating that he believed this change will mean that, when looking at funding retirement, families may be more inclined as a starting point to ‘switch on’ their pensions to fund retirement.

Beyond this, he said that it was essential to carefully consider any changes to pension arrangements and seek financial advice, as the best approach will vary from person to person.

As pensions will be in scope of IHT, Lancaster argued that many will be looking for alternative, tax-efficient savings or investment vehicles for estate planning.

"I think the key point here is that pensions remain tax efficient,” Lancaster noted. “The loss of exemption is a blow but was expected at some point given the lifting of the lifetime allowance by the Conservatives.”

"There may be a shift in mindset for those individuals who perhaps have pensions but were avoiding utilising them where they had sufficient wealth outside of them to fund their day-to-day lifestyles and these pension pots were seen as a way to pass a valuable asset down to their children.

"We shouldn’t forget, however, that the most valuable aspect of pensions is the gross tax-free roll-up of income and gains on the investments within them and mathematically, the impact of this over the long term is still hugely valuable."

Wilson Wright urged families to seek professional financial advice to help them understand the implications of the IHT changes and develop a tailored plan to address them effectively.

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