In brief:
- From April 2027, unused pension funds will be brought within the IHT net.
- The knock-on effect for charitable legacies in existing Wills is less well understood, and potentially costly.
- Could you or your clients end up giving significantly more to charity than intended?
From April 2027, most unused pension funds and death benefits will form part of an estate for inheritance tax (IHT). Where the value exceeds the available nil rate band, IHT will be chargeable at 40%, subject to available relief (i.e. spouse / charity exemption).
Guidance on the new rules is gradually being released, and the wider implications of those changes are considerable.
One specific repercussion affects those making charitable gifts on their death of at least 10% of their estate to qualifying charities (the 10% charitable legacy) and claiming the reduced IHT rate of 36% (reduced rate). The calculation is complicated. For these purposes an 'estate' is made up of several different components: general, survivorship and settled property. The 10% charitable legacy and reduced rate can be isolated to a single component, alternatively, components can be merged so that the combined component qualifies for the reduced rate.
Technical guidance published 11 May 2026 confirms the intention is for any unused pension funds and death benefits subject to IHT under the new rules to form part of the general component for the purpose of calculating the 10% charitable legacy.
If this is the case, from April 2027 the minimum value of the 10% charitable legacy required to claim the reduced rate will be increased. This is because the value of the pension fund and death benefits would be aggregated with the value of the estate within the general component, which forms the basis of the calculation to determine the minimum value that must be given to charity to benefit from the reduced rate of IHT.
Where a Will has been drafted to include a specific 10% charitable legacy clause, linked to the minimum value required to be gifted to charity under the legislation, the value of that legacy could be significantly more than originally intended from April 2027.
Wills and pension nominations should now be reviewed and carefully drafted to ensure:
- awareness of the potential increase in value to a 10% charitable legacy in a Will, from April 2027, due to the IHT changes on pensions;
- identification of the source of funds used to pay the legacy; whether from the estate, the pension fund and death benefits or a combination; and
- any planning and philanthropic opportunities for those with unused pension funds and death benefits who had not previously considered the 10% charitable legacy and reduced rate option.