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Free Ebook for UK Pension Transfers
By Trish Harding

There are some upcoming and proposed changes to be aware of for those with assets and/or UK Pension funds in the UK

 

Recommended Considerations:

  1. If you, your family or friends still retain a Pension Fund in the UK…it will be worthwhile contacting Sterling Planners for a discussion and considering whether a UK Pension transfer to Australia to avoid the proposed IHT changes to include unspent pension fund assets maybe appropriate.
  2. Review Your Estate Plan: Contact your tax advisers and estate planners who have expertise, or can recommend expertise, in both UK and Australian tax laws. Assess how the inclusion of UK pension assets in IHT calculations impacts your overall estate and consider strategies to mitigate potential tax liabilities.
  3. Stay Informed: Keep abreast of further developments in UK tax legislation to ensure your estate planning remains effective and compliant.

 

Key issues:

The United Kingdom is implementing significant reforms to its Inheritance Tax (IHT) system, where they will be transitioning from a domicile-based framework to a residence-based one effective from 6 April 2025. This change could have significant implications for individuals residing outside the UK, including those in Australia, who hold UK assets or have UK connections.

 

Key Changes to UK Inheritance Tax:

  1. Transition to Residence-Based Taxation:
    • Currently, IHT liability is primarily determined by an individual’s domicile status. However, from 6 April 2025, the UK will adopt a residence-based approach. Under this new system, individuals who have been UK tax residents for at least 10 out of the previous 15 tax years will be classified as ‘long-term residents’ and subject to IHT on their worldwide assets.
  2. Impact on Non-UK Residents:
    • Non-UK residents will continue to be liable for IHT on UK-based assets, such as UK real estate or shares in UK companies. The new residence-based rules primarily affect those who have substantial ties to the UK or have spent considerable time as UK residents. It’s essential to assess the value of these assets and consider potential IHT liabilities.
  3. Domicile Considerations:
    • Your domicile status remains a critical factor. Even if you reside in Australia, but are deemed domiciled in the UK, your worldwide assets could be subject to UK IHT. The new rules extend the period after leaving the UK during which former long-term residents remain within the IHT net, increasing it from the current three years to ten years.
  4.  Inclusion of Pension Funds in IHT Assessments:
    • Current Exemption: Presently, unspent pension funds are generally exempt from IHT, allowing individuals to pass on their remaining pension assets to beneficiaries without incurring this tax.
    • Proposed Change (Effective April 2027): The UK government has announced plans to include unspent pension funds within the scope of IHT from April 2027. This means that any remaining funds in a pension at the time of an individual’s death will be considered part of their estate for IHT purposes, potentially reducing the amount available to your beneficiaries. It is proposed that his IHT will be deducted, and paid, by the fund administrator
    • Double taxation: in circumstances where the unspent pension funds are subject to IHT, at 40%, the remaining funds paid to beneficiaries could also be taxed as income to them in the tax year it is received.
    • Administrative Considerations: Experts have raised concerns that this change may lead to significant delays and increased administrative burdens for beneficiaries, as the process of valuing and taxing pension assets could complicate estate administration.

 

The UK Inheritance Tax (IHT) rate:

  • 40% on the value of an estate above the individuals £325,000 nil-rate band.
  • An additional £175,000 tax-free allowance applies if leaving their main residence to direct dependants
  • 0% (tax-free) for assets passed to a spouse/civil partner…but IHT will apply, as above, on their death.

 

These changes, and proposed changes are significant. We would highly recommend proactively addressing these changes, so those potentially affected can better manage their retirement assets and minimise potential tax burdens on beneficiaries.

Should you wish to discuss, or refer a family member or friend, please contact Nigel Leverett, General Manager at Sterling Planners on nigel@sterlingnextstep.com.au.

 

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