Charitable giving could soften the impact of pension tax reforms

Strategies now regarded as tax-efficient may need to change, writes ​Alec Stewart in The Scotsman today. Read the full article below, republished by kind permission of The Scotsman:

For many years, pensions have occupied a unique position in estate planning. While intended to provide retirement income, they also became an effective means of passing wealth to future generations because unused pension funds generally fell outside an individual’s estate for inheritance tax (IHT) purposes. That position is now due to change.

From April 2027, unused pension funds are expected to be brought within the scope of IHT for many estates. As a result, individuals who previously had little concern about inheritance tax may find themselves facing an unexpected liability, while those already exposed to IHT could see their tax bill increase significantly.

The reforms represent one of the most significant estate planning changes in recent years. Pensions can no longer be viewed in isolation and will need to be considered alongside property, investments, business interests and other assets when assessing overall inheritance tax exposure.

Against this backdrop, charitable giving may become increasingly attractive. Many people leave gifts to charity because they wish to support causes that matter to them and create a lasting legacy. However, charitable legacies can also provide valuable inheritance tax benefits.

Under current rules, estates that leave at least 10 per cent of the relevant taxable amount to charity may qualify for a reduced IHT rate of 36 per cent, rather than the standard 40 per cent.

For some families, a carefully structured charitable gift could reduce the overall tax burden while continuing to provide a meaningful benefit to beneficiaries.

The changes may also encourage individuals to think more carefully about how charitable gifts are made. Traditionally, charitable legacies have often been included in a Will. However, once pension funds are brought within the IHT regime, there may be circumstances where directing charitable gifts through pension benefits produces a more favourable overall result.

Another important consideration is the Residence Nil Rate Band (RNRB), which can provide an additional inheritance tax allowance of up to £175,000 per person. This allowance begins to reduce once an estate exceeds £2 million in value. The inclusion of pension wealth could therefore have consequences beyond simply increasing the value of an estate. Some individuals may find themselves pushed above the £2m threshold, resulting in the loss of some or all of the RNRB and further increasing their inheritance tax exposure.

For many families, the reforms will require a fresh look at arrangements that may have been in place for years. Strategies that were previously regarded as tax-efficient may no longer deliver the same results when pension wealth is taken into account. Charitable giving will not be the right solution for everyone, but it may play an increasingly important role in estate planning as the new rules approach. More broadly, the changes highlight the importance of reviewing pensions, Wills and succession plans together rather than treating them as separate matters.

With April 2027 drawing closer, individuals may wish to review their arrangements sooner rather than later. Taking advice early could help identify opportunities, manage tax exposure and avoid unwelcome surprises for future generations.

This article was produced with the assistance of Lauren Kidd, Summer Student at Murray Beith Murray, whose research and contributions supported the preparation of this piece.