Home / Understanding the 2027 changes to pensions and inheritance tax
29th July 2026
Elaine Roche, Partner
Having dealt with both the change from “domicile” to “long-term UK resident in 2025 and the Business and Agricultural Relief revisions in 2026, private tax advisers now finally have the chance to consider the next round of changes to Inheritance Tax rules: that unused pension funds will, from April 2027 form part of a person’s estate for IHT.
HMRC have released a technical note and have promised further “guidance and other supporting material” and even an interactive tool before April 2027, but as advisers we need to guide our clients now as to what can be done ahead of the rules coming into force.
What we do know is that from April 2027, any unused funds in a pension will form part of the general component of an estate. So, if you are already receiving your pension from a defined benefits scheme, this change will not affect your estate.
On death, any funds in the pension will be subject to IHT at 40%. If a person dies over the age of 75, having paid the IHT on the pension within the estate, the individuals receiving the remaining 60% of the funds, will have to pay income tax at their own marginal rates on those funds. So, in the worst-case scenario, a pension worth £1 million would be subject to £400,000 of IHT and then £270,000 of income tax, leaving the beneficiaries with just £330,000 of a potential £1,000,000.
It gets even worse for those who, by reason of the inclusion of the pension in their estates, now have an estate of over £2.35 million (£2.7 million for a couple) as they have now completely lost the benefit of the Residence Nil Rate Band, which results in an additional £140,000 of IHT across the whole estate.
For business owners who have their business premises within their pension, the bad news continues, as business relief is not applicable to pension assets.
If this is your situation, then it is worth considering whether keeping the property in the pension is the right thing to do or whether the 50% IHT relief that could apply if the property was held personally outweighs the benefits of keeping it in the pension. It is also worth noting that loss on sale relief (i.e. a reduction in the IHT due if a property sells at a lower value within 4 years of death) does not apply to properties held within the pension.
There is no instalment option available for IHT due on pension funds, so the whole tax bill must be within 6 months of death.
For those whose wills include a gift of 10% of the estate to charity and therefore benefit from the reduced rate of IHT on the rest of the estate, the “rest of the estate” now encompasses the full value of the pension. We have many clients where they have panned their estates such that family and friends receive the pension and charities receive the estate in order to pass everything as tax efficiently as possible. However, post April 2027, the rules will result in a very different split of the estate from that envisaged when the will was drafted.
It is also worth noting that even though the value of the pension will be included in the 10% gift, many pension providers may be unable to make gifts to charity under their pension trust rules.
So, what can you do to mitigate the effect of the upcoming changes? There is no silver bullet, no one size fits all plan, but with timely, joined up advice between your financial adviser and your lawyer there is planning that can be done to ensure that tax is mitigated and your estate passes to your beneficiaries at the right time.
If you would like advice on inheritance tax planning, get in touch with our tax & estate planning team on 0161 832 3434, or at [email protected].