Inheritance tax (IHT) receipts on unused pension funds are set to "create confusion and increase the risk of gifting mistakes" for the Bank of Mum and Dad, Key Advice has warned.

The Government has estimated that the inclusion of unused pensions in IHT from April 2027 will generate an additional £3.44bn in the first three years of implementation, but the equity release adviser has warned that this figure will be higher if parents and grandparents make mistakes with gifting.

Data from Savills has shown that parents and grandparents paid out £9.6bn through gifts and loans for house purchases in 2024, and have contributed £38.5bn in the past four years compared with £22.5bn in the four years previously.

Key stated that 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..

Therefore, the equity release adviser has urged parents and grandparents to seek independent advice as part of their retirement and estate planning strategies.

Key said that parents and grandparents can use withdrawals from pensions to fund gifts if they are part of normal spending, come from income and leave then 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.

However, the position is dependent on individual circumstances, highlighting the importance of customers receiving specialist advice before making decisions.

Chief executive officer at Key Advice, Will Hale, 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."

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