Charitable gifts in wills: impact of pension inheritance tax changes
If you have included a charitable gift in your will and have an unspent pension fund, it’s important to review the terms of your will before those pension funds are brought into the scope of inheritance tax (IHT) from 6 April 2027.
Historically, suitably qualified advisers would have advised clients to spend other capital before accessing pensions – even capital in individual savings accounts (ISAs), as the pension funds would not normally have attracted IHT on death. The new legislation will change that.
The IHT charge will be on “notional pension property”: broadly speaking, the value of unspent funds. The spouse exemption will apply to pensions passing to a surviving spouse or civil partner.
How the IHT charge will affect charitable legacies
Since 6 April 2012, if a person’s will gifts a minimum of 10% to charity, that gift is exempt from IHT (as has long been the case) and the rate of IHT on the remainder of the chargeable estate is reduced from the normal 40% to 36%.
The 10% can be calculated on the taxable value of the whole estate or on individual components. Those components are:
- The survivorship component: property held as beneficial joint tenants that accrues on death to the surviving owner(s), often the matrimonial home
- The settled property component: the deceased’s interest in certain trusts where the beneficiary is deemed to own the underlying capital
- The general component: the deceased’s “free estate” i.e. those assets that pass by will
Notional pension property is to be regarded as part of the general component of the estate. That could have unexpected and unwelcome consequences.
Example:
Mr Adams is a bachelor who has not made any lifetime gifts. His free estate comprises his house worth £750,000 and £250,000 in an ISA. He also has £1,500,000 in a self-invested personal pension (a SIPP) with a nomination of unspent funds in favour of his son from a brief relationship. His will uses formula wording to gift 10% of the net estate to a registered charity, with the remainder passing to his sister.
If Mr Adams dies before 6 April 2027:
- The charity will receive £67,500 (£1,000,000 less £325,000 nil rate band @10%)
- His sister will receive £713,800 (£1,000,000 less £67,500 to charity less IHT at 36% on £607,500 of £218,700)
If, however, Mr Adams dies on or after 6 April 2027, using the percentage-based formula wording the charity will receive £217,500 (£2,500,000 less £325,000 nil rate band @10%).
If, rather than using formula wording, Mr Adam’s will had left a fixed legacy of £67,500 to the charity, it would no longer constitute 10% of the general component – so the rate of IHT on the remainder would be 40% not 36%.
While further government guidance is expected in the coming months, this example shows the importance of reviewing your will before April 2027 to ensure that it reflects your wishes and allows for the latest tax implications.
How BKL can help
Taking advice early can help you stay ahead of these changes and put the right plans in place.
Our specialists in estate and IHT planning can guide you through the factors that may affect your IHT liability, and help you to structure your wealth as tax-efficiently as possible.
This includes writing and updating wills, and the appropriate use of trusts.
For a chat about how we can help you, get in touch with Ryan Bevan using the form below.
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Frequently asked questions: Impact of pension IHT changes on charitable legacies in wills
How are pensions currently treated for inheritance tax purposes?
Pension funds are usually outside the scope of inheritance tax (IHT) under current rules. This means unspent pension savings can often be passed on to beneficiaries without forming part of the taxable estate. As a result, individuals have historically been advised to draw on other assets first.
From 6 April 2027, this treatment changes significantly, with most unused pension funds becoming subject to IHT as part of the estate. This shift has important implications for estate planning, particularly where wills include charitable legacies.
What is changing for pensions and IHT from April 2027?
From 6 April 2027, unspent pension funds will generally be included in a person’s estate for IHT purposes. These funds will be treated as “notional pension property” and form part of the taxable estate calculation. While the spouse or civil partner exemption will still apply, transfers to other beneficiaries may trigger IHT.
This change removes the longstanding advantage pensions had as an IHT-efficient asset and means many individuals will need to revisit how their wealth is structured and passed on.
How can pension changes affect charitable gifts in a will?
Including pensions within the estate can unexpectedly increase the value used to calculate charitable gifts. Where a will uses a formula (for example, leaving 10% of the estate to charity), the inclusion of pension funds can significantly increase the amount passing to charity.
This may be advantageous in some cases, but it can also reduce what is left to other beneficiaries. Reviewing the wording of your will is essential to ensure that the outcomes still align with your intentions.
Why does the 10% charitable legacy rule matter for IHT?
Leaving at least 10% of a taxable estate to charity can reduce the IHT rate on the remainder from 40% to 36%. This rule, introduced in 2012, can create a meaningful tax saving.
However, the 10% test is calculated based on specific estate components, including the “general component” where pensions will now sit. If pension values increase that component, it may alter whether the 10% threshold is met, potentially changing the overall tax rate applied.
What happens if a will uses a fixed charitable amount instead of a percentage?
A fixed cash gift to charity may no longer qualify for the reduced 36% IHT rate if estate values change. This is because the fixed amount might fall below the required 10% threshold once pensions are included in the estate. In that scenario, the full 40% IHT rate would apply to the remaining estate. This is a common oversight and highlights the importance of aligning will drafting with evolving tax rules.
Should I review my will before the new rules take effect?
Yes, reviewing your will before April 2027 is strongly recommended if you have pension savings and charitable legacies.
Changes may be needed to ensure the intended balance between beneficiaries is preserved and that any available IHT reliefs are not lost. This is particularly important for wills using formula clauses or fixed charitable gifts.
Early review also allows time to consider wider estate planning strategies.
Are there planning opportunities to mitigate the IHT impact of pension changes?
There may still be opportunities to manage IHT exposure, but they require more careful planning than under the current regime. Options could include revisiting pension nominations, adjusting the mix of assets used for lifetime spending, or restructuring how charitable gifts are made.
Each individual’s position will differ depending on asset composition, family circumstances and long-term objectives, so tailored advice is essential.
Who is most likely to be affected by these changes?
These changes will particularly affect individuals with significant defined contribution pensions, such as SIPPs, alongside other assets like property or ISAs. They are also highly relevant where estates include charitable legacies or complex will structures.
Business owners, entrepreneurs, and private clients with accumulated pension wealth should assess the impact carefully, as the inclusion of pensions could materially increase their estate’s IHT exposure.
Does leaving pension funds to a spouse still avoid IHT?
Yes, the spouse or civil partner exemption continues to apply under the new rules. Pension funds passed to a surviving spouse or civil partner will generally remain exempt from IHT on first death. However, the position on second death may still result in a taxable estate, so longer-term planning remains important. This makes coordinated estate planning between partners even more critical.
A common misconception: are pensions still an IHT “safe haven”?
No, pensions will no longer be a reliable way to avoid inheritance tax from April 2027. While they have traditionally been treated as outside the estate, the new rules bring them firmly into scope.
Many existing estate plans are built around the old assumptions, so failing to update them could lead to unintended tax liabilities or distributions that no longer reflect personal wishes. A proactive review helps ensure plans remain effective under the new legislation.
