Pensions and IHT 2027: How the Upcoming Changes Could Affect Your Estate

Inheritance Tax (IHT) has long been a concern for those wanting to pass wealth on to the next generation. With a standard rate of 40% applied to the value of an estate above the nil-rate band, it can significantly erode what you leave behind. Now, a major change is on the horizon. From 6 April 2027, unused pension funds will be drawn into the scope of IHT for the first time. The earlier you act, the more options available to you – speak to our specialist team today to review your position.

Key Points at a Glance

• IHT is charged at 40% on estates above the nil-rate band of £325,000 – or up to £1 million for married couples leaving a home to direct descendants.
• From 6 April 2027, unused defined contribution pension funds will be included in your estate for IHT purposes – a major shift from current rules.
• An estimated 38,500 estates will pay more IHT as a result; the average additional liability is approximately £34,000 per affected estate.
• Legal mitigation strategies include lifetime gifting, equity release, charitable giving, and pension planning. 

What is Inheritance Tax?

IHT is a tax on the estate of someone who has died – covering all property, money, and possessions. The standard nil-rate band (NRB) currently stands at £325,000, frozen until at least 2030. The Residence Nil-Rate Band (RNRB) of up to £175,000 applies when leaving your main home to direct descendants – meaning individuals can potentially pass on up to £500,000 tax-free. Married couples and civil partners can combine their allowances for a potential joint threshold of up to £1 million. A reduced rate of 36% applies where at least 10% of the net estate is left to charity.

Estates that fall below the applicable threshold pay no IHT at all. Use our Inheritance Tax Calculator to estimate your potential liability.

Who is Affected by Inheritance Tax?

IHT is no longer just a concern for the very wealthy. Rising property values and growing pension pots mean many more families are finding themselves above the threshold than a generation ago. Unmarried couples are particularly exposed – unlike married couples and civil partners, they cannot transfer unused nil-rate band allowances between them, meaning each individual is limited to their own £325,000 threshold. Estates worth more than £2 million also see the RNRB tapered. Business owners may qualify for Business Property Relief (BPR), which can reduce or eliminate IHT on qualifying assets.

If you are unsure whether your estate is at risk, our advisers can review your position and help you plan ahead.

IHT and Pensions: The 2027 Changes

Currently, most unused defined contribution pension funds sit outside your estate for IHT purposes, making them a useful vehicle for passing on wealth. The Government has recognised this shift and introduced legislation to bring it to an end.

From 6 April 2027, unused pension funds and certain death benefits will be included in your estate and taxed at 40% on any amount above the nil-rate band. The Government’s own figures illustrate the scale of the impact. Among the estimated 213,000 estates with inheritable pension wealth in 2027-28:

• Around 10,500 estates will face IHT for the first time as a direct result of the changes.
• A further 38,500 estates will pay more IHT than they otherwise would have.
• The average additional tax liability per affected estate is approximately £34,000.

Death in service benefits remain outside the scope of IHT, and transfers to a surviving spouse, civil partner, or registered charity remain exempt. Administratively, responsibility for reporting and paying IHT on pension assets will fall on personal representatives rather than pension scheme administrators – adding complexity to estate administration.

For full technical guidance, see HMRC’s guidance on IHT on unused pension funds. These changes make it essential to review your estate plan well before 2027 – speak to our team today to understand your options.

Ways to Mitigate Inheritance Tax

There are several legitimate, legal strategies to reduce your IHT liability. Effective mitigation almost always requires acting well in advance – the earlier you begin, the more options you have. 

Lifetime Gifting and Inter Vivos Transfers

Gifts made to individuals fall outside your estate for IHT purposes if you survive seven years after making them – the well-established ‘seven-year rule.’ Taper relief reduces the tax on gifts made between three and seven years before death. Annual exemptions include a £3,000 gift allowance per person (with any unused amount carried forward for one year), a £250 small gift exemption per recipient, unlimited regular gifts from surplus income, and wedding gifts of up to £5,000 to a child.

Equity Release

Homeowners aged 55 and over can unlock property value without selling their home. By drawing down equity and gifting it during your lifetime – subject to the seven-year rule – you can reduce the taxable value of your estate while retaining the right to remain in your property. Learn how equity release could work for your estate plan.

Charitable Giving

Leaving at least 10% of your net estate to a qualifying charity reduces the IHT rate on the remainder from 40% to 36%. For larger estates, this represents a meaningful saving – and allows you to support causes important to your family.

Pension Planning

With the 2027 changes approaching, it is worth reviewing how you draw on your pension in retirement. Spending pension funds earlier – rather than preserving them as an inheritance vehicle – could reduce your taxable estate before the new rules take effect. The optimal approach depends on your personal circumstances and income needs. Find out more about our pension & retirement planning services.

Trusts

Placing assets into a trust can remove them from your estate for IHT purposes, depending on the type of trust and how it is structured. Trusts can also allow you to retain some control over how and when assets are distributed. See our Trusts and Trustee Services page for more detail.

Business Property Relief

If you own qualifying business assets, Business Property Relief (BPR) may reduce their value for IHT purposes – in some cases by up to 100%. This is a complex area where specialist advice is strongly recommended.

Speak to our tax team about ways to mitigate inheritance tax. 

Frequently Asked Questions

Will the 2027 changes affect everyone?

Not everyone will be impacted. Those most at risk are individuals with large pension pots alongside other significant assets such as property or investments. If your total estate – including pension funds – remains below the nil-rate band, you are unlikely to face additional IHT. Use our calculator to check your position.

Are death in service benefits affected?

No. Death in service benefits remain outside the scope of inheritance tax and are not affected by the 2027 IHT pension changes.

What can I do now to prepare?

The most effective strategies – lifetime gifting, reviewing pension drawdown, trusts, and charitable giving – all benefit from acting early. Contact our team to discuss your options before the 2027 changes take effect.

Get Expert Advice on Inheritance Tax Planning

Inheritance tax is becoming an increasingly complex area – and the upcoming changes to IHT and pensions in 2027 mean the window for effective planning is narrowing. At Ward Goodman, our experienced tax and financial planning advisers help individuals and families understand their IHT exposure, identify the most effective strategies for their circumstances, and put a plan in place that protects their estate for the people who matter most.

Find out more about our Inheritance Tax Planning services, or contact our team today to arrange a confidential conversation.