The UK Government has announced major changes to inheritance tax (IHT) rules that will affect pensions from April 2027. For many individuals, this could significantly increase the amount of tax their estate has to pay.
For years, pensions have been one of the most tax-efficient ways to pass on wealth. However, that advantage is set to change. If you have built up a pension alongside property or savings, your estate could be more exposed than you realise.
Understanding these changes now gives you the opportunity to act early, reduce your tax exposure and protect more of your wealth for your family.
What Is Changing in 2027?
Currently, unused pension funds can often be passed to beneficiaries outside of your estate for inheritance tax purposes. This has made pensions a key tool in estate planning.
From 6 April 2027, the Government intends to include most unused pension funds and certain death benefits within a person’s estate for inheritance tax purposes. [1] This means pension savings may be taxed at 40% if your estate exceeds the available thresholds. [2]
In addition, the administrative process is expected to become more complex, with personal representatives, pension providers and beneficiaries needing to coordinate reporting and payments.
Current Inheritance Tax Thresholds
As of March 2026, the key thresholds are:
- Nil-rate band: £325,000 [3]
- Residence nil-rate band: £175,000 (if passing a home to direct descendants)
- Potential combined allowance: up to £1 million for married couples or civil partners
However, these thresholds are frozen until at least April 2030, meaning more estates are likely to become liable as asset values rise over time. [4]
How Many People Could Be Affected?
Inheritance tax already affects more people than many assume. HMRC data shows that 31,500 estates paid inheritance tax in the 2022 to 2023 tax year, representing 4.62% of UK deaths. Total IHT liabilities reached £6.7 billion. [5]
The 2027 pension changes are expected to increase this further. Government estimates suggest that:
- 10,500 estates will pay inheritance tax where they previously would not
- 38,500 estates will face higher inheritance tax bills
- The average increase in tax could be around £34,000 per affected estate
These figures highlight how pensions could push many more families over the inheritance tax threshold.
Why You Should Act Now
These changes are not yet in force, which means there is still time to plan.
Acting early allows you to:
- Review how your pension fits into your overall estate
- Reduce your estate’s taxable value where appropriate
- Ensure your will and estate structure are up to date
- Take advantage of existing exemptions and planning opportunities
Waiting until 2027 could limit your options and increase the risk of avoidable tax.
The Laws Behind Inheritance Tax
Inheritance tax in the UK is governed by several key pieces of legislation. The Inheritance Tax Act 1984 sets out how tax is applied to estates, including thresholds, exemptions and lifetime transfers.
Estate planning also involves the Wills Act 1837, which governs how wills are created and validated, and the Administration of Estates Act 1925, which deals with how estates are managed after death.
The upcoming pension changes are being introduced through Government policy and are expected to be formalised through future Finance legislation following the Autumn Budget.
Key Estate Planning Strategies to Consider
There is no one-size-fits-all solution, but common strategies include:
Reviewing your will
A properly drafted will ensures your estate is distributed according to your wishes and can improve tax efficiency.
Making lifetime gifts
Some gifts fall outside your estate if you survive seven years, although the rules can be complex. Read our guide on the seven year rule for more information.
Using trusts
Trusts can help protect assets and manage how wealth is passed down. You can learn more about this on our trusts page.
Holistic estate planning
Looking at your estate as a whole, including pensions, property and savings, is essential. The estate planning services offered by ASL Solicitors can help structure your affairs efficiently.
How ASL Solicitors Can Help
We specialise in estate planning, wills, trusts and inheritance tax matters. Based in Rochdale, we support individuals and families across Greater Manchester.
We can help you review your estate, identify potential tax risks and put a clear plan in place that aligns with current UK legislation and your personal circumstances.
Contact us to discuss your estate planning options.
Frequently Asked Questions
No. The changes are expected to apply to most unused pension funds and certain death benefits, but the exact treatment will depend on the type of pension, the benefits involved and the final legislation. [1]
The Government has stated that the changes are due to take effect from 6 April 2027. [1]
Government estimates suggest that around 10,500 estates will become liable for inheritance tax where they would not have been before, and around 38,500 estates will pay more inheritance tax than under the previous rules. [1]
According to Government estimates, the average increase in inheritance tax for affected estates could be around £34,000, although the actual amount will vary depending on the size of the estate and the assets involved. [1]
The standard nil-rate band is £325,000. There is also a residence nil-rate band of up to £175,000 where qualifying conditions are met. In some cases, married couples and civil partners can pass on up to £1 million using transferable allowances. [3]
No. Inheritance tax thresholds are currently frozen until at least 5 April 2030, which means more estates may become taxable over time as property values and pension pots grow. [4]
Potentially, yes. Depending on your circumstances, options may include making a valid will, considering lifetime gifts, using trusts where appropriate, and reviewing how your estate is structured overall. Professional advice is important because inheritance tax planning must be tailored to your personal circumstances.
Yes, in many cases it makes sense to review your will and wider estate plan well before the new rules take effect. A will that was drafted when pensions sat outside the inheritance tax calculation may no longer be the most tax-efficient approach.
While there is no legal requirement to instruct a solicitor, professional advice can help make sure your estate planning is valid, tax efficient and aligned with current legislation. Mistakes can be expensive and difficult for families to resolve after death.
Yes. ASL Solicitors advise on estate planning, wills, trusts and inheritance tax matters. They can help you review your estate, understand potential tax exposure and put suitable arrangements in place. You can also visit their Estate Planning page and Trusts page for more information.
References
1) HM Revenue & Customs – Inheritance Tax: unused pension funds and death benefits:
https://www.gov.uk/government/publications/inheritance-tax-unused-pension-funds-and-death-benefits/inheritance-tax-unused-pension-funds-and-death-benefits
2) GOV.UK – Inheritance Tax overview:
https://www.gov.uk/inheritance-tax
3) GOV.UK – Inheritance Tax thresholds:
https://www.gov.uk/inheritance-tax
4) HM Treasury – Autumn Budget and threshold freeze:
https://www.gov.uk/government/publications/autumn-budget-2024-overview-of-tax-legislation-and-rates-ootlar
5) HM Revenue & Customs – Inheritance Tax liabilities statistics:
https://www.gov.uk/government/statistics/inheritance-tax-liabilities-statistics/inheritance-tax-liabilities-statistics-commentary