Inheritance Tax on Pensions from 2027: What the New Rules Mean for Your Estate
From 6 April 2027, unused pension funds and pension death benefits are due to be brought within the scope of Inheritance Tax (IHT), significantly changing the role pensions have traditionally played in estate planning.
Current Position
At present, most pension funds sit outside an individual’s estate for Inheritance Tax purposes. This has enabled many individuals to use pension savings as a tax-efficient way of passing wealth to future generations.
Currently, personal representatives are responsible for reporting and paying Inheritance Tax arising on a deceased individual’s estate.
The New Rules
Under legislation due to take effect from 6 April 2027, most unused pension funds and pension death benefits will be included when calculating the value of an individual’s estate for Inheritance Tax purposes.
The changes are expected to apply to both UK registered pension schemes and qualifying non-UK pension schemes.
Responsibility for reporting and paying any Inheritance Tax attributable to unused pension funds and death benefits will largely fall on pension scheme administrators, rather than solely on the personal representatives of the estate.
A limited number of specified pension benefits will remain outside the scope of Inheritance Tax , although these exemptions are unlikely to apply to most pension arrangements.
What Does This Mean?
Many individuals have historically viewed pensions as one of the most effective vehicles for passing wealth to future generations free from Inheritance Tax . From April 2027, this may no longer be the case.
For families where pension assets represent a significant proportion of overall wealth, the inclusion of these funds within the taxable estate could substantially increase their exposure to IHT. In some cases, estates that would previously have fallen below the available IHT thresholds may become chargeable to tax.
It may also become necessary to revisit existing estate planning arrangements, including:
• The order in which assets are used during retirement
• Pension beneficiary nominations
• Lifetime gifting strategies
• Trust planning arrangements
• Succession plans that have been built around pension wealth remaining outside the estate
In addition, beneficiaries may need to consider the interaction between IHT and income tax. Depending on the circumstances, pension benefits could be subject to IHT on death and income tax when funds are subsequently withdrawn by beneficiaries. Where the pension fund has already suffered IHT at 40%, and the beneficiary then pays income tax at their marginal rate on drawings, the combined effective tax rate could be close to 70%.
Speak to our business valuation and tax advisers
If you believe these changes could affect you or your family, now is a good time to review your estate planning arrangements.
Our private client team can help you assess the impact of the new rules, review your existing structures and identify strategies to help manage future IHT liabilities while preserving family wealth for future generations.
With Cowgills teams across the North West, including Bolton, Liverpool, Manchester, Stockport and Wigan, we work with business owners and families throughout the region to provide practical, joined-up advice tailored to their circumstances.
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