| From April 2027, unspent defined contribution pensions will be subject to IHT liabilities | Average IHT bills could rise by £34,000, with risks of double taxation reducing pension value further | Options to reduce exposure include gifting, trusts, charitable legacies and life cover written in trust |
From April 2027, unspent defined contribution pensions will become subject to IHT – a significant departure from today’s rules, where pensions usually sit outside the estate.
The impact on households is likely to be far greater than official estimates suggest. Rather than only capturing the super-rich, these changes risk pulling in ordinary families where pensions and property values together push estates over the threshold. With property prices and pension wealth both rising over recent decades, many more households than expected could find themselves facing large and unexpected tax bills.
The change also risks complicating estate administration. Executors will need to factor pensions into IHT calculations for the first time, potentially delaying the probate process and creating new liabilities. Another concern is the risk of double taxation. Pensions inherited after age 75 are already taxed as income, and from 2027 could also attract IHT – meaning beneficiaries may see more than half of the value eroded by tax.
Steps to consider
There are currently several ways to mitigate exposure to IHT, including making use of tax-free gifts, establishing trusts, leaving charitable legacies (which can reduce the overall IHT rate to 36%), or arranging a whole-of-life insurance policy written in trust to cover liabilities. Read more on how to gift efficiently on page 12.
This development highlights the importance of proactive estate planning. With rules changing, pensions can no longer be assumed to fall outside IHT. Reviewing arrangements now could help safeguard family wealth and ensure it is passed on as intended. And with the budget approaching, more changes may still come.
It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored advice and is for guidance only. Some rules may vary in different parts of the UK.
