As you will be fully aware by now, the IHT and pensions landscape is set to undergo a substantial change in the 2027/28 tax year.
You’re probably already working the basics into your conversations with clients now – and without clear-cut guidance from the FCA on how the calculations will work, what more can you do?
Although the landscape remains a little unclear, one area we think deserves more attention ahead of time is the expression of wish form.
Read on to find out why.
Most people aren’t aware of the upcoming IHT change, nor how it could affect them in real terms
Standard Life research, published by FTAdviser, revealed that 9 in 10 UK adults aren’t aware that pensions will be rolled into IHT calculations in April 2027.
And, Pensions Age reports that upwards of 152,000 estates are expected to face new or increased IHT bills between 2027 and 2030.
Zooming out even further, this is a three-pronged problem for retirees:
- Unused pension benefits will be included in IHT calculations from the 2027/28 tax year.
- Frozen Income Tax thresholds and IHT nil-rate bands are causing fiscal drag – the House of Commons Library says that the Income Tax freezes alone will raise more than £55 billion in 2030/31.
- The cost of living is rising, with some projections warning of surging food prices due to fertiliser shortages if the Middle East conflict continues, coupled with the rapid rise in energy costs that we are already experiencing.
It’s clear that clients will have some awareness of the rising cost of living and frozen tax bands, but the FTAdviser report indicates that many are still in the dark about the IHT change.
While this could affect a number of aspects of their financial plan, including how they choose to take their retirement income and their tax-efficient estate plan, one area that can’t be ignored is pension expression of wish forms.
Beneficiary nomination forms will become all the more crucial once new IHT rules come into effect
As you will know, your clients need to fill in their beneficiary nomination/expression of wish form for each pension they hold with a separate provider.
At the moment, these ensure that pension providers can bequeath pension funds to the right person after the pension holder’s death. But as pensions are free from IHT, a blank form means that the funds would be passed down according to the laws of intestacy and wouldn’t affect the IHT liability on the estate.
However, from April 2027, a blank or outdated expression of wish form could significantly affect an estate’s IHT position.
Let’s look at an example.
David passes away in June 2027 and bequeaths everything he has to his children in his will, minus his main home, which he has passed directly to his wife, Sarah. She has her own savings and investments and they agreed that their adult children are more in need of the wealth.
His estate, minus his home – which benefits from the spousal exemption – is worth £600,000, including:
- A rental property worth £300,000
- A mix of shares and cash in his ISAs, worth £300,000.
If David had passed away in 2026, the taxable portion of his estate would be £275,000 – the value of the above, minus the nil-rate band.
But there’s a problem: it’s June 2027, and David’s £400,000 pension is now included in his estate’s IHT calculations. His expression of wish form has been left blank, and it’s up to the pension provider to decide who receives it.
As David’s will clearly states that he wants the children to receive everything minus the home he shares with his wife, the pension provider could take this into consideration and opt to include the pension in the children’s inheritance. This would take the estate’s taxable portion from £275,000 to £675,000.
In the first scenario, assuming IHT is paid at 40%, the bill could be £110,000. In the second, it could rise to £270,000.
Alternatively, they could opt for his wife to receive the pension, at which point IHT would not be affected.
But the point is, his family has no control over how the wealth is bequeathed and could potentially face a much bigger IHT bill as a result.
Seeing the expression of wish form as an opportunity for clever estate planning
Your clients may not relish the thought of combing through their pension information and ensuring all the forms are filled in correctly – particularly if they have several pensions to their name.
They may also, and understandably so, be taking a “doom and gloom” approach to the closure of the IHT-pension loophole.
As their adviser, you can reframe the narrative and help them see their expression of wish form as a tool for clever IHT planning, not just another form to fill in.
For example:
- Nominating a spouse or civil partner means their pension would likely benefit from the spousal exemption.
- If they want to leave pension wealth to a child, they could consider splitting the nomination between children and their spouse, lessening the impact.
- If your client is adamant about nominating children or grandchildren, you could suggest the possibility of making lifetime gifts from their pension, if appropriate, to adequately reduce its value over time.
While the inclusion of pensions is not ideal for clients, putting their beneficiary nominations in the spotlight sooner rather than later may help them regain control of their estate’s tax liability.
Become part of our community and face the changing landscape head-on
Adapting your advice in light of new legislation is one of the greatest challenges IFAs face. This is particularly true now, when the government is making it harder for the “squeezed middle” to build wealth and for high net worth individuals to hold onto their legacy.
When you’re a part of the Corbel Partners network, you will benefit from:
- Access to expert paraplanners, without the unmanageable overheads
- One-to-one support from our founders and directors, Paul and David
- Bespoke software that helps you track your CPD and flag client vulnerabilities
- Support with running your business your way
- A community of likeminded IFAs who prioritise client care above all else.
Want to learn more? Email hello@corbelpartners.co.uk or call 01925 637891.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate tax and estate planning.