
Understanding the 2025 Inheritance Tax Changes
The 2025 Budget introduced significant changes to inheritance tax (IHT) regulations, which will take effect on April 6, 2027. One of the most notable changes is the inclusion of pension funds in the taxable estate, meaning that unused pension funds and death benefits will now be subject to IHT. This shift is crucial for individuals nearing retirement to understand, as it introduces the concept of double taxation on inherited pensions. With pensions previously enjoying a degree of protection from IHT, beneficiaries now face complex financial implications that could affect their retirement planning and overall wealth transfer strategies.
1. Understanding Double Taxation
Definition of Double Taxation
In the context of the new IHT rules, double taxation refers to the scenario where pension funds are taxed both at the point of inheritance and when beneficiaries withdraw those funds. Under the previous system, if a pension holder died before age 75, their beneficiaries could inherit the remaining pension tax-free. However, if they died after age 75, the inherited funds would be taxed at the beneficiary’s marginal income tax rate. With the new rules, these pension funds will also be included in the estate’s value for IHT purposes, effectively subjecting them to a 40% tax above the £325,000 nil-rate band.
Mechanics of Taxation
Upon the death of a pension holder, any unused funds within their pension scheme will be included in their estate for IHT calculations. The pension scheme administrator will be responsible for reporting and paying any IHT due to HMRC. After settling any IHT liabilities, beneficiaries will then receive the remaining pension funds, which will be subject to income tax at their marginal rates if withdrawn. This process creates a situation where beneficiaries could face significant tax liabilities on inherited pensions, leading to effective tax rates that may reach as high as 67% when both IHT and income tax are considered.
2. Case Studies and Scenarios
Hypothetical Examples
To illustrate how these new IHT rules impact different financial situations, consider the following scenarios:
- Example 1: A pension holder who dies before age 75 currently allows their beneficiaries to inherit their pension tax-free. Under the new rules effective from April 2027, if this individual has a significant amount in their pension pot, that value will now count towards their estate for IHT calculations. If their total estate exceeds £325,000 due to other assets combined with the pension fund, beneficiaries could face substantial tax liabilities upon inheritance.
- Example 2: In contrast, consider a scenario involving a pension holder who dies after age 75. In this case, not only will their beneficiaries incur inheritance tax on the pension pot (at an effective rate of 40%), but they will also pay income tax on withdrawals from that pot at their marginal rate. For instance, if a beneficiary inherits £100,000 from a pension pot after age 75 and withdraws it entirely, they might pay £40,000 in IHT and then an additional £45,000 in income tax (if they fall into the highest tax bracket), leaving them with just £15,000 from that initial £100,000.
Potential Liabilities
These examples highlight how individuals could face significant liabilities under the new rules. As pensions become part of taxable estates for IHT purposes, beneficiaries must prepare for potentially steep financial consequences when inheriting these assets. Understanding these implications is essential for effective financial planning and ensuring that loved ones are not burdened with unexpected tax liabilities.

Government Rationale
Policy Intent
The government’s decision to include pensions in the inheritance tax (IHT) regime stems from a desire to reshape how individuals utilize their retirement savings. By making pension funds subject to IHT, the government aims to discourage the use of pensions as a tax-planning vehicle for wealth transfer. Historically, many individuals have preserved their pension pots with the intention of passing them on to heirs without incurring tax liabilities, effectively using pensions as a means of estate planning. The new rules are intended to encourage individuals to draw down their pensions during their lifetime, thereby promoting the original purpose of pensions: providing income in retirement rather than serving solely as a wealth transfer mechanism.
Financial Implications
The inclusion of pensions in the IHT framework is also expected to generate significant additional tax revenue for the government. The Office of Budget Responsibility estimates that approximately 10,500 estates will become liable for IHT due to the inclusion of pension assets, leading to an average additional tax bill of £34,000 per estate. This change addresses growing concerns about wealth inequality, as it targets affluent individuals who have historically benefited from tax-free transfers of pension wealth. By implementing these reforms, the government seeks to create a more equitable tax system that ensures those with substantial assets contribute fairly to public finances.
Future Considerations
As part of the implementation process for these new IHT rules, the government has initiated a consultation period that will run until January 22, 2025. This consultation aims to gather feedback from financial experts, industry stakeholders, and the public regarding the practical implications of including pensions in taxable estates. The insights gained during this period could lead to adjustments or clarifications in how these rules are applied, addressing potential concerns raised by those affected.
Impact of Feedback
Responses from financial experts and the public will play a crucial role in shaping the final implementation of these changes. Concerns have already been raised about the potential for double taxation and its impact on retirement savings behaviour. If significant opposition arises during consultations, it may prompt the government to reconsider certain aspects of the policy or provide additional guidance on mitigating tax liabilities for beneficiaries.
Long-Term Planning
In light of these potential changes and ongoing discussions, individuals should begin considering long-term planning strategies that account for possible adjustments to inheritance tax regulations. Engaging with financial advisors can help individuals navigate this evolving landscape and develop personalized strategies that align with their retirement goals while minimizing tax burdens. As the landscape surrounding pensions and inheritance tax continues to shift, proactive planning will be essential for ensuring financial security in retirement.
Conclusion
The new inheritance tax rules introduce significant implications for double taxation on inherited pensions, necessitating careful consideration by individuals nearing retirement. Understanding how these changes will affect financial planning is crucial for mitigating potential tax burdens and ensuring that beneficiaries are not left with unexpected liabilities. By staying informed and engaging in proactive financial planning, individuals can better navigate this complex landscape and secure their financial futures amidst evolving regulations.
Take Control of Your Financial Future: Get Expert Guidance on Inheritance Tax Today!
Navigating the complexities of inheritance tax, especially with the recent changes affecting pensions, can be daunting. At Van Eaton Solicitors, we are dedicated to helping you understand these new regulations and their implications for your estate planning.
Are you prepared for the impact of double taxation on inherited pensions? Our experienced team is here to provide you with tailored advice that considers your unique financial situation and helps you develop effective strategies to protect your wealth. Whether you need assistance with estate planning, understanding your rights as a beneficiary, or exploring options to minimize tax liabilities, we are here to guide you every step of the way.
Contact us today for a no-obligation consultation! Fill out our online enquiry form or call us at 020 8769 6739 to speak directly with one of our inheritance tax specialists. Don’t leave your legacy to chance—let us help you secure your financial future and ensure your loved ones are taken care of. Take action now!