Families rush to raid pensions amid fears of HMRC inheritance tax raids

Affluent British families are accelerating efforts to withdraw pension savings and transfer significant sums to their adult children ahead of major inheritance tax changes due in April next year.

Financial advisers and pension providers report a rise in requests from clients with large defined contribution pension pots, driven by concern over the approaching tax changes.

The reforms, set to take effect from April 2027, will bring most unused pension wealth within the scope of inheritance tax for the first time.

From April 6, pension savings left unused at death could be subject to a 40 per cent inheritance tax charge where the total estate exceeds the £325,000 nil-rate threshold.

Government estimates suggest an additional 10,500 estates will become liable for inheritance tax as a result of the changes, while 38,500 estates are expected to pay more, with average increases of £34,000 compared with current rules.

Rachel Vahey, head of public policy at AJ Bell, said: "There's now less than a year left before any unused pension savings could be included as part of pension savers' estates for inheritance tax (IHT) purposes."

Ms Vahey said: "The new rules have forced many people saving for retirement to rethink their plans and deal with a tax they never expected when they started putting money into their pension."

Jason Hollands, managing director at wealth manager Evelyn Partners, said the planned changes are influencing behaviour among clients.

Mr Hollands said: "The inheritance tax overhaul is likely playing a role in clients drawing down their pensions sooner and in greater amounts."

Advisers report increased interest in established exemptions that can reduce inheritance tax liabilities.

This includes the £3,000 annual gifting allowance and the seven-year rule, under which gifts are usually exempt if the donor survives for seven years.

Clare Moffat, pensions and tax expert at Royal London, said: "We have received a lot of questions from financial advisers about clients who want to gift large amounts to children for house purchases, for example, and that could often come from tax free cash."

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The "normal expenditure out of income" exemption is also receiving attention, allowing individuals to make regular payments from surplus income once their own living costs are covered.

Sean McCann, chartered financial planner at NFU Mutual, said: "Gifts out of normal expenditure are one of the most valuable but least well-known inheritance tax exemptions, allowing those with surplus income to pass on wealth through regular gifting."

Mr McCann said there is no fixed upper limit on such gifts, as the amount depends on an individual’s income and standard of living.

She added that detailed records must be kept as claims are assessed after death.

Experts have warned that applying this exemption to pension income requires careful consideration.

Elsa Littlewood, private wealth partner at BDO, said: "Where someone accesses their pension through flexible drawdown over a relatively short period, I can see a situation where HMRC might challenge a claim for gifts out of income."

Christine Ross, head of private office, north, at Handelsbanken, said: "Clients should ensure gifts are properly documented and made at consistent intervals and amounts to meet the requirements."