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IHT PENSION CONFUSION THREAT FOR BANK OF MUM AND DAD

19 August 2025

Key highlights need for specialist advice on tax and income risks to BOMAD of gifting from pensions and property

19 August 2025: IHT on unused pension funds will create confusion and increase the risk of gifting mistakes for the Bank of Mum and Dad and Gran and Grandad, Key Advice, the UK’s leading equity release adviser, warns.

The Government estimates* the inclusion of unused pensions in IHT from April 6th, 2027, will generate an additional £3.44 billion in IHT receipts in the first three tax years it operates but Key Advice warns the figure will be higher if parents and grandparents make mistakes with gifting.

Industry data** shows parents and grandparents paid out £9.6 billion last year in gifts and loans for house purchases and have contributed £38.5 billion in the past four years compared with £22.5 billion in the four years previously.

Making unused pension assets potentially liable to IHT will complicate the decision on gifting, and which sources of capital to use, increasing the risk of potentially costly mistakes either in the form of higher tax bills or a reduced standard of living, Key warns.

It is urging parents and grandparents to seek independent advice as part of their retirement and estate planning strategies.

Parents and grandparents can use withdrawals from pensions to fund gifts if they are part of normal spending, come from income and leaves them with enough money to fund their normal standard of living. Tax-free cash can be taken in a lump sum and gifted if the donor lives a further seven years. But as always the position is dependent on individual circumstances, therefore highlighting the importance of customers receiving specialist advice before making decisions.

Parents and grandparents facing potential IHT bills due to the change in the law from April 2027 may consider making gifts from pensions or taking more income than they need in order to mitigate potential IHT bills. However, there could be tax risks for those inheriting the money which also need to be considered – someone inheriting a £100,000 pension fund which is subject to IHT could also end up paying more in income tax as well.

Key says housing wealth can be used to support capital and/or income needs in later life and for intergenerational wealth transfer through gifting. Gifting from property wealth may reduce IHT liabilities if the donor survives seven years. Modern equity release products could offer a more flexible or tax-efficient way to support family compared to other strategies so highlighting the importance of advisers considering all options and working with specialist referral partners to ensure good outcomes for all parties.

Will Hale, CEO Key Advice & Air, said:

“The inclusion of unused pension assets in IHT calculations is expected to generate substantial extra revenue for the Government as more estates become liable.

“It underlines the importance of advice for parents and grandparents on how to fund and structure gifts to family while maintaining their own standard of living and being tax efficient.

“The new rules further reinforce the need for property wealth to be included as part of retirement income and estate planning. Later life lending products can help fund retirement and also be used as an IHT mitigation tool.”