Increasing numbers of people in Scotland need to carefully consider how they might be affected by changes to Inheritance Tax (IHT), as the addition of pension funds to IHT eligibility may push many more above the payment threshold.

From 6 April 2027, changes to UK Government rules means that most unused pension funds and pension death benefits will fall within the value of a person’s estate for IHT purposes.

It is a significant shift from current arrangements, where unused pension pots and pension death benefits are shielded from the 40% tax charge. Yet Aileen Entwistle, Partner in our Private Client Services team, believes many people may not fully appreciate the impact of the change.

With funds from most workplace and private pensions falling into the realms of what will become taxable by HM Revenue and Customs (HMRC), she is urging individuals and married couples to seek legal and financial advice as to how their estates may be most effectively planned in time for the forthcoming changes.

Aileen said: “The reality is that although these incoming changes may not be an issue for some, for those with already significant assets and large pensions pots, these changes could have a considerable impact on their IHT liability as well as the additional administrative burden on their estates that these changes will attract.

“However, there are steps that anyone who thinks they may be affected can begin taking in order to manage their liability and bring peace of mind, but the key is not to leave this until the last minute.

“Along with my colleagues, I am encouraging people to review their current arrangements now, seek professional legal and financial advice to identify whether the changes will affect them and if so, to ensure that they are prepared for the new rules.”

Managing the pensions change

Among the steps that people may consider, after advice tailored to their own circumstances and family dynamics, is greater “lifetime giving”.

There are a number of possible gifting strategies that could be utilised including making tax-free gifts of up to £3,000 per year while allowances to support weddings and civil partnerships are also available. More substantial gifting may be considered by making regular gifts out of surplus income.

Charitable gifting and using trust arrangements may be an option depending on your personal circumstances.

It is worth noting that gifts fall outwith your estate after seven years.

Aileen also highlighted the need for people to keep full and accurate records of their gifting and overall financial arrangements and to ensure that those responsible for managing them know how they can be accessed.

Taking specialist pension advice to review current pension arrangements as well as beneficiary nomination forms is recommended and advice is particularly relevant where pension drawn down is being considered or for those approaching 75.

In addition to this, Aileen stresses the importance of taking time to review existing Will arrangements to ensure that Will planning takes account of these new rules, and that the terms of existing Wills do not have unintended consequences for your IHT position and beneficiaries.

Aileen added: “The forthcoming pension changes will also increase the administrative duties expected of executors so now may be a good time to review those you have chosen to fulfil this role.

“Taking professional advice now to understand whether you will be impacted by the forthcoming pension rules will go a long way in providing peace of mind, and will ensure that you have clear arrangements in place for those benefiting from your estate on your death.”

If you would like to speak to Aileen, or anyone in our Private Client Services team to discuss how Inheritance Tax may affect you, please contact us now - we would be delighted to help.