Many people are reviewing their estate planning following the government’s decision to bring unused pension funds into the scope of inheritance tax (IHT) from 6 April 2027.
For some, this has meant taking larger withdrawals from their pension and passing money on to children or grandchildren during their lifetime. While this approach may reduce a future inheritance tax bill, it could have another consequence that is often overlooked.
If long term care is needed later in life, those gifts could come under scrutiny.
In England, anyone with capital and savings above £23,250 is generally expected to pay the full cost of their residential care.
While the value of your home is often ignored if a spouse, qualifying relative or dependent child continues to live there, other savings and investments are taken into account when assessing what you should contribute.
It is perfectly acceptable to make gifts as part of legitimate estate planning. However, local authorities also have powers to investigate whether someone has deliberately reduced their assets in order to qualify for financial support with care costs.
This is known as deprivation of assets.
As more people withdraw money from their pensions to reduce the value of their estate for inheritance tax purposes, there is a greater chance that substantial gifts could later be questioned if residential care becomes necessary.
If a local authority concludes that assets were deliberately given away to avoid paying care fees, it can assess you as though you still own those assets. This means you could still be expected to fund your care, despite no longer having access to the money.
One of the biggest misconceptions is that gifts become safe after a certain number of years.
Unlike some inheritance tax rules, there is no fixed time limit on how far back a local authority can investigate. Instead, they will consider the circumstances surrounding the gift, including whether the need for care could reasonably have been anticipated when it was made.
This means gifts made while someone is fit, healthy and living independently are often much easier to justify than those made after a diagnosis or when health has already begun to decline.
If you are making significant gifts, it is sensible to keep clear records explaining why they were made.
Evidence that gifts formed part of a wider estate planning strategy or were intended to help family members with milestones such as buying a first home or supporting education may help demonstrate that avoiding future care costs was not the motivation.
Inheritance tax planning remains an important part of financial planning, particularly as pension rules continue to evolve. However, it should never be considered in isolation.
Before making substantial pension withdrawals or gifting significant sums, it is worth considering how the decision could affect your financial security in later life, including the possibility of needing residential care.
Taking advice before making these decisions can help ensure your plans remain effective while avoiding unintended consequences for you and your family.
Age UK’s detailed factsheet on deprivation of assets is available here.
All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.
