The planned inclusion of unused pension funds in Inheritance Tax (IHT) from April 2027 could create widespread confusion for parents and grandparents helping younger generations onto the housing ladder, according to Key Advice.
The Government estimates that bringing unused pensions into IHT will generate an additional £3.44bn in receipts in the first three tax years of operation.
However, Key Advice warned that the final figure could be higher if families make mistakes when gifting money.
Industry data showed that parents and grandparents gifted or loaned £9.6bn towards house purchases last year alone.
Over the past four years, family contributions have totalled £38.5bn, up significantly from £22.5bn in the four years prior.
Key warned that the new IHT rules will complicate decisions over which capital sources to use for gifting, increasing the risk of costly mistakes – either in the form of higher tax bills or reduced living standards for donors.
The firm has urged families to seek independent advice as part of their retirement and estate planning.
Currently, withdrawals from pensions can be used for gifting if they form part of normal spending, come from income, and leave the donor with enough to maintain their standard of living.
Tax-free cash can also be gifted if the donor survives a further seven years.
However, Key stressed that the right approach depends heavily on individual circumstances, highlighting the importance of professional advice.
Families facing potential IHT bills from 2027 may consider making gifts from pensions or drawing more income than required to reduce their estate’s liability.
But Key noted this strategy could create further risks – for example, someone inheriting a £100,000 pension fund subject to IHT could also face higher income tax on top.
Instead, the firm argued that property wealth should be considered as part of later-life financial planning.
Housing wealth can be used to support capital or income needs in retirement and transferred through gifting.
Equity release products, Key said, could offer a flexible and tax-efficient alternative compared to pension withdrawals, depending on circumstances.
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.”
