
Preparing for Change: Inheritance Tax and Pensions in 2027
The landscape of inheritance tax (IHT) is set to undergo significant changes starting April 6, 2027, particularly concerning pensions. Under the new rules, unused pension funds and death benefits will be included in the value of an estate for IHT calculations. This change is crucial for beneficiaries to understand, as it could lead to increased tax liabilities and necessitate a reevaluation of estate planning strategies. With the potential for more families to become subject to IHT, awareness and preparation are key to navigating these upcoming regulations.
Overview of Changes
Inclusion of Pensions in IHT
From April 2027, pensions will no longer be exempt from inheritance tax, marking a notable shift in how estates are valued. Previously, pension funds could pass to beneficiaries without incurring IHT, especially if the holder died before age 75. However, under the new regulations, any unused pension funds and death benefits will contribute to the total estate value when calculating IHT liabilities. This means that beneficiaries may face a more substantial financial burden when inheriting pensions.
Impact on Beneficiaries
The inclusion of pensions in the IHT regime is expected to affect approximately 10,500 estates annually, which will now be liable for inheritance tax due to their pension wealth. According to estimates from the Office of Budget Responsibility, around 38,500 estates may incur an average additional IHT bill of £34,000 as a direct result of these changes. This shift could significantly impact how individuals plan their estates and manage their pensions, as more families find themselves drawn into the complexities of inheritance tax.
Effective Tax Rates
Double Taxation Explained
One of the most concerning implications of these changes is the potential for double taxation on inherited pensions. Beneficiaries may face both inheritance tax and income tax when accessing pension funds. For instance, if a pension holder dies after age 75, their beneficiaries will pay income tax at their marginal rate on any withdrawals from the pension that has already been subjected to IHT at a rate of 40%. This could lead to an effective combined tax rate as high as 67%, particularly for higher-rate taxpayers.
Examples of Tax Implications
To illustrate the impact of these new rules, consider a hypothetical scenario involving an estate valued at £2.7 million that includes a £1 million pension pot. Under current regulations, the estate would only be liable for IHT on the amount exceeding the nil-rate band of £325,000. However, with pensions now included in the estate’s value, the total taxable amount increases significantly. In this case, the estate would incur a much higher IHT bill due to the combined value of assets and pensions pushing it over the £2 million threshold, thereby losing access to certain allowances like the residence nil-rate band.
Implications for Estate Planning
Revisiting Estate Strategies
With the upcoming changes to inheritance tax (IHT) regarding pensions, individuals must reassess their estate planning strategies. The inclusion of pension funds in the taxable estate means that traditional methods of wealth transfer may no longer be as effective. Beneficiaries should consider withdrawing funds from their pensions earlier in retirement rather than leaving them untouched for inheritance purposes. This shift could help minimise the overall tax burden, as funds drawn down from pensions will not be subject to IHT. Additionally, individuals may want to explore alternative strategies, such as gifting assets during their lifetime or establishing trusts, to protect their wealth from potential tax liabilities.

Planning for Future Tax Liabilities
Proactive planning is essential to mitigate the potential tax burdens introduced by the new IHT rules. Individuals should consider drawing down pensions earlier and converting those funds into more flexible assets, such as cash savings or investments held outside of pension schemes. This approach allows for greater control over how and when taxes are paid. Furthermore, understanding the implications of these changes on overall estate value is crucial; estates exceeding £2 million may lose access to certain allowances, such as the residence nil-rate band, which could exacerbate tax liabilities. Engaging with financial advisors can provide tailored strategies that align with individual circumstances and long-term financial goals.
Exemptions and Allowances
Current Exemptions
Despite the significant changes to inheritance tax regulations, some exemptions will still apply. For instance, transfers of unused pension funds between spouses and civil partners will remain exempt from IHT. This provision allows individuals to plan effectively for their partners’ financial security without incurring additional tax liabilities upon death. Additionally, charity lump sum death benefits will continue to be exempt from IHT, encouraging individuals to consider charitable giving as part of their estate planning strategy.
Residence Nil Rate Band Considerations
The inclusion of pensions in the estate value for IHT calculations may impact eligibility for the residence nil rate band (RNRB). This band allows individuals to pass on a primary residence to direct descendants without incurring IHT up to a certain threshold. However, if the total estate value exceeds £2 million due to included pension assets, the RNRB may be reduced or eliminated entirely. As a result, families with significant pension wealth should carefully evaluate how these changes affect their eligibility for this valuable relief and consider adjustments to their estate planning accordingly.
Conclusion
The upcoming changes to inheritance tax present significant implications for pension beneficiaries and require careful consideration in estate planning. With pensions now included in taxable estates effective April 6, 2027, individuals must navigate the complexities of double taxation and reassess their strategies for wealth transfer. Understanding current exemptions and planning proactively can help mitigate potential tax burdens and ensure that beneficiaries receive the maximum benefit from inherited assets. As these changes approach, consulting with financial advisors will be crucial in developing effective strategies tailored to individual circumstances and financial goals.
Secure Your Legacy: Get Expert Guidance on Inheritance Tax Today!
Navigating the complexities of inheritance tax can be challenging, especially with the upcoming changes that will affect how pensions are treated in estate planning. At Van Eaton Solicitors, we understand the importance of protecting your wealth and ensuring your loved ones benefit from your estate without unnecessary financial burdens.
Are you prepared for the new inheritance tax rules? Our team of experienced solicitors is here to help you understand your inheritance tax implications and develop a tailored strategy that maximises your estate’s value. Whether you need assistance with estate planning, navigating the probate process, or understanding your rights as a beneficiary, we offer expert legal advice to guide you through every step.
Contact us today for a no-obligation consultation! Fill out our online enquiry form or call us at 020 8769 6739 to speak directly with one of our inheritance tax specialists. Let us help you secure your family’s financial future and ensure your wishes are honoured. Don’t leave your legacy to chance—take action now!