Why inheritance tax planning is more important than ever

Focus on what hasn’t changed as well as what has, writes Fraser Scott in The Scotsman today. Read the full article below, republished by kind permission of The Scotsman:

Much has been made (understandably) of the government’s decision to bring unused pensions within the scope of inheritance tax from the start of the 2027/28 tax year. For years, pensions have occupied a unique position in estate planning, allowing many individuals to preserve their pension wealth for future generations while drawing on other assets first. Of course, that long-standing assumption is about to change. Yet, amid the headlines, speculation and political debate, one important feature of the inheritance tax system has received far less attention: the spouse or civil partner exception. In many respects, it is about to become even more valuable.

The reforms are intended to ensure that pensions are used for their ordinary function – a means of funding retirement – rather than as vehicles for passing on inheritance tax-free wealth. While the policy objective is open to debate, the practical consequence is clear. Pension funds that have traditionally fallen outside a person’s taxable estate may now increase the inheritance tax exposure for many families. That does not, however, mean that every estate will suddenly face an inheritance tax bill. Nor does it mean that long-established reliefs available under the inheritance tax regime have simply disappeared. In particular, transfers between spouses or civil partners continue to benefit from an unlimited inheritance tax exemption.

In simple terms, assets left to a surviving spouse or civil partner are generally exempt from inheritance tax on the first death. This ability to defer any tax charge until the survivor’s death remains one of the most significant reliefs available within the UK tax system. Its importance is arguably heightened by the forthcoming pension reforms. Where pension wealth forms part of the inheritance tax calculation, careful consideration of how assets are owned, how pension death benefits are nominated, and how Wills are structured becomes increasingly important.

Estate planning has never been solely about reducing tax, but about ensuring assets pass in accordance with individual wishes while making sensible use of reliefs Parliament has chosen to provide. If a couple has the bulk of the family wealth inside a pension, the exemption may determine whether tax is a future, or immediate, concern, and should encourage couples to revisit long-standing arrangements. Even minor adjustments to ownership or nomination choices can substantially influence the eventual inheritance tax position, underscoring the value of proactive review rather than reactive concern.

The reforms also introduce greater complexity. Executors are likely to face additional administrative burdens when valuing pension benefits, while advisers have raised concerns that some beneficiaries could face both inheritance tax and income tax on inherited pension funds. Whether this constitutes genuine double taxation in practice is debated, but it highlights the increasingly intricate interaction between tax regimes.

Perhaps the greatest lesson is that this is not simply a story about pensions, but rather a story about planning. Wills drafted many years ago, pension nomination forms left untouched and assumptions that once made perfect sense may all deserve a second look. The new rules undoubtedly change the landscape, but do not rewrite every principle on which good estate planning has been built. If anything, they reinforce the need for regular, thoughtful engagement with one’s own affairs, ensuring that decisions made today continue to serve their intended purpose tomorrow.

Sometimes, the most valuable protections are not the ones that have been introduced, but the ones that quietly remain.