Pensions and inheritance tax: what’s changing in 2027

Attivo Pension Series – Part 2

In Part 2 of Attivo’s three-part Pension series, Associate Director Ryan Wright explains how pensions interact with IHT now, what’s changing from April 2027, and who may be affected.

Words by Sophie Marie Atkinson

One great benefit of pensions is that they can be passed on to your family entirely free of Inheritance Tax (IHT). 

However, this benefit is set to change from 6 April 2027, as most unused pension funds will be included in the value of your estate for IHT.

Why are the rules changing?

“The argument behind this change is that pensions are for retirement, not IHT planning – and it’s having quite the impact” explains Ryan.

“People have been planning on the basis that they can be handed down,” he continues, “so they are naturally quite angry about the change. I have a client, for example, who is 87. He’s been preserving his pension for as long as he can so that he can pass it on to his children. But this could now mean that his IHT bill goes up from £50,000 to £1,000,000 overnight.”

“Pensions are a bit of a political football that tend to get kicked about a lot,” says Wright, “This is where the help of a financial planner becomes key, as we can help to make plans in advance, and adapt those plans effectively when rules and regulations change.”

Ryan is referring to the fact that pensions generally grow free of tax, unlike income from interest and dividends. With ISAs, the current contribution limit is £20,000 a year before paying tax, whereas with pensions, this limit is either 100% of your salary, or £60,000 (whichever is lowest).

A lifetime allowance used to exist for pensions but was scrapped in April 2024 and – despite rumours – has not been reinstated.

This was a limit on how much individuals could build up across their pension pots before paying a tax charge, and during its existence, the limit ranged from £1 million to £1.8 million.

Will everyone need to pay IHT?

It’s important to remember that even with this change, IHT might not be a concern for many people because, first and foremost, when assets are left to a spouse or registered civil partner, they are exempt from IHT.

Everyone also has an entitlement to what is known as a “nil rate band,” currently of £325,000 – meaning that combined assets of up to this value can be left to loved ones free of IHT. This is your “tax-free threshold,” frozen at this amount until 2030.

If you pass on your home to your children or grandchildren, your individual threshold can rise by up to £175,000 (the residential nil rate band, also frozen until 2030) to a total of £500,000.

Finally, your spouse’s IHT allowance rises by the percentage of your unused allowance. This means a married couple can leave up to £1 million tax free (2 × £325,000 tax free allowances + 2 × £175,000 main residence allowances), provided the estate is worth £2 million or less.

For estates above £2 million, the residence nil‑rate band is tapered away at a rate of £1 for every £2 over this threshold, which can reduce or eliminate this additional allowance.

Tax planning is not an activity that is regulated by the Financial Conduct Authority. Tax treatment depends on individual circumstances and may be subject to change in the future.