Charging inheritance tax 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, equity release specialist Key Advice has warned.

From April 2027 inherited pension pots will be subject to IHT, Chancellor Rachel Reeves announced in her autumn Budget.

The Government reckons the change will generate an additional £3.44bn in IHT receipts in the first three tax years, but Key said the figure will be higher if parents and grandparents make mistakes with gifting.

The firm said the changed rules will complicate parents' and grandparents' decision 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.

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

The rules allow parents and grandparents to 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 the position is dependent on individual circumstances, highlighting the importance of customers receiving specialist advice before making decisions.

Data published by property specialist Savills showed parents and grandparents paid out £9.6bn last year in gifts and loans for house purchases and have contributed £38.5bn to help family members buy a home in the past four years compared with £22.5bn in the four years previously.

Will Hale, chief executive at Key Advice, said: “The inclusion of unused pension assets in IHT calculations 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 reinforce the need for property wealth to be included as part of retirement income and estate planning.”