How could pensions be included in inheritance tax

Bringing pensions within the scope of IHT would be a radical and complex shift. Currently, pension capital is held within trusts, keeping it outside the policyholder’s estate on death, making pensions an effective IHT planning tool. Implementing this change would require significant legislative reform, as most pensions are set up under discretionary trusts, where assets are legally owned by trustees, not the individual.
If pensions were brought within the IHT scope, it could have widespread implications. For individuals, this could diminish the attractiveness of pensions as a means of passing on wealth to beneficiaries, leading to a reassessment of retirement and estate planning strategies.
Moreover, such a change could also impact non-pension discretionary trusts, which are often used for broader estate planning. Any move to tax pensions within trusts could lead to a ripple effect, creating uncertainty and potentially higher tax burdens for a wide range of trust arrangements.

Most pensions are currently free of inheritance tax when passed on to a beneficiary. Pensions can therefore be a great tool to tax-efficiently pass on wealth to loved-ones, without the limitation of access for the owner that other inheritance planning strategies like trusts and business relief investments have.

If the government decided to bring pension assets into what's included when calculating inheritance tax this could have massive impacts on the plans of thousands of people.

It could drive people away from pensions to instead invest in overly-complex, potentially dodgy tax schemes in a bid to preserve their hard-earned money.

We could also see the masses cashing in their pensions in a panic, paying excess income tax and leaving themselves short for the future.

Overall, we think this is a bad idea and this kind of tinkering with the tax system might give the government a short-term sugar rush of tax revenue, but long term could have seriously bad implications.

The sun may be setting on the golden age of pension inheritance, as looming IHT reforms threaten to turn pensioners' nest eggs into sitting ducks and unleash a financial storm on the next generation.

Pensions enjoy a privileged status under UK tax law, as when a pension holder dies, the remaining funds are not subject to IHT. This incentivises individuals to preserve pension wealth, using other assets to fund retirement, allowing substantial sums to be passed on tax-free. However, this potential change could transform pensions from a safe harbour for wealth preservation into a taxable asset, altering financial strategies for millions. The proposed IHT reform may appear to level the playing field, yet this policy could discourage long-term saving, with many less inclined to contribute to pensions if they know their savings will be further taxed upon their death. Furthermore, with pensions already subject to income tax after age 75, adding IHT could be like squeezing blood from a stone.

Inheritance tax (IHT) urgently needs reform, especially as soaring house prices push more families above the IHT threshold. The Residence Nil Rate Band (RNRB) offers some relief, but many are blindsided by the tax implications on their home - their only substantial asset. For many, rising property values turn their home into a tax trap, not a nest egg. Trusts can help manage estates, but these tools are often misunderstood or out of reach, leaving less financially savvy individuals disproportionately burdened. Without reform, IHT will continue to hit the unprepared hardest, making financial planning more crucial than ever.