Autumn Budget IHT change provides welcome boost for charitable giving

A change to inheritance tax rules announced at the Autumn Budget will prevent people who leave part of their estate to charity from being unfairly penalised when unused pensions come within the scope of inheritance tax, an Irwin Mitchell tax expert has said.

From 6 April 2027, unused pension wealth will be brought within the scope of inheritance tax (IHT). This had created a potential problem for people intending to leave at least 10% of their estate to charity in order for the remainder to qualify for the reduced 36% IHT rate, rather than the standard 40%.

Because a Will does not control how pension funds are distributed, the addition of unused pension wealth to an estate could have prevented some estates from meeting the 10% charitable giving threshold, despite this being the deceased’s clear intention.

The government has now confirmed that the legislation will be amended. Those administering an estate will be able to choose whether pension property is included as part of the general estate or treated as a separate component when calculating entitlement to the reduced IHT rate, allowing the more favourable result to apply.

John Bunker, Consultant Solicitor and Chartered Tax Adviser at Irwin Mitchell and Joint Chair of the Chartered Institute of Taxation’s Pension IHT Working Group, said:

“We are delighted that the government has accepted our recommendation and will change the rules to prevent people who leave part of their estate to charity from being unfairly disadvantaged because they also have unused pension funds.

 

“Without this amendment, someone could leave 10% of their estate to charity in their Will, reasonably expecting the remainder to qualify for the reduced 36% inheritance tax rate, only for pension funds brought into their estate after their death to upset that calculation.

 

“While we are disappointed that some of our other recommendations on pensions IHT have not, for now, been picked up, we are certain that this change will provide greater incentive to support charities and more certainty for families and personal representatives. It demonstrates the value of consulting tax professionals on how major tax reforms will work in practice before they take effect.”

The government has also announced measures intended to simplify the administration of estates once the new pension rules take effect. Prospective personal representatives (administrators where no will or no executor) will be able to direct pension scheme administrators to pay inheritance tax due on pension funds directly to HMRC, as executors of estates can do. Details are awaited in the draft Finance Bill.

The changes come ahead of unused pension wealth entering the inheritance tax regime in April 2027 and underline the importance of reviewing Wills and wider estate planning to ensure existing arrangements continue to achieve their intended outcome.

John was recently awarded the Chartered Institute of Taxation’s Certificate of Merit in recognition of his long-standing contribution to tax policy and simplification. His work has included engagement with HMRC and policymakers on inheritance tax, trusts and estates. 

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