From April 2027, changes to Inheritance Tax (IHT) treatment on pensions are expected to alter how many families approach estate planning.

For years, pensions have commonly sat outside a person’s estate for IHT purposes. This allowed pension savings to be passed on relatively efficiently after death, particularly where other assets could be used during retirement instead.

The planned changes could reduce that advantage for many families.

What is changing?

Under the proposed rules from April 2027, unused pension funds are expected to become subject to IHT as part of the estate in many cases.

This means pension savings that may previously have passed outside the estate could now increase the overall IHT exposure on death.

The unused pension pots will still be transferable between spouses and civil partners.

For individuals with substantial pension pots, property wealth or business interests, the effect could be considerable.

It’s estimated that around 10,500 estates will become liable for IHT for the first time due to this change.

Many people have built retirement and estate plans around the current rules.

Where pensions were intentionally left untouched to pass wealth to children or grandchildren, those plans may now need revisiting.

What are the IHT allowances?

Each person has a set amount you can pass on tax-free when you die, known as the Nil-Rate Band (NRB).

The amount is fixed at £325,000 per person until April 2031.

Alongside the standard NRB, families may also benefit from the Residence Nil-Rate Band (RNRB).

The RNRB currently provides an additional allowance of £175,000 where a main residence is passed to direct descendants, such as children or grandchildren.

If eligible, the individual will therefore be able to pass on £500,000 worth of their estate to their beneficiaries, with anything above this value being taxed at 40 per cent.

If you are married or in a civil partnership and leave your estate to your spouse or partner, no inheritance tax is due when you die.

Any unused allowances transfer to them, allowing up to £1 million of IHT allowances to be set against their estate when they pass away.

However, when an estate is worth more than £2 million, the RNRB does start to shrink, reducing by £1 for every £2 the estate exceeds that threshold.

When the net estate (after liabilities but before reliefs) exceeds £2.35 million, or £2.7 million with a transferred allowance, the RNRB is fully removed.

Therefore, people with larger estates will need to plan accordingly.

How will these changes impact IHT and estate planning?

The changes may affect decisions around:

• How retirement income is drawn
• Whether pension funds should still be preserved
• Gifting strategies during lifetime
• Beneficiary nominations
• The structure of wills and trusts
• Wider family succession planning

For some families, using their savings while leaving pension funds untouched may no longer produce the most tax-efficient outcome.

Others may need to reconsider how assets are divided between spouses, children and other beneficiaries.

Could this affect you?

These changes do not necessarily mean more tax liabilities for everyone. The effect will depend on the size and structure of the estate, available reliefs and how existing plans have been arranged.

You may want to review your position if you:

• Have substantial pension savings
• Expect your estate to exceed available IHT allowances
• Have property likely to qualify for the RNRB
• Have existing estate planning arrangements based on pensions sitting outside your estate
• Intend to pass wealth to children or grandchildren
• Own a business or have other valuable assets alongside pension savings

Even where the changes do not create an immediate tax issue, they may still alter how assets should be managed during retirement.

How we can help

You should revisit your estate planning regularly, especially when tax rules change.

We can help you review:

• Your likely IHT exposure
• Existing wills and estate planning arrangements
• Pension beneficiary nominations
• The use of available allowances and reliefs
• Potential gifting opportunities

The right approach will depend on your personal circumstances, family arrangements and long-term intentions, which is why our team will always tailor their advice to the individual.

To discuss how the April 2027 pension IHT changes could affect your estate, please get in touch.