Inheritance Tax Planning
The Pensions Inheritance Tax Trap
Inheritance Tax Planning
FOR YEARS, PENSIONS have been one of the few places a family could pass on wealth without inheritance tax getting involved. From April 2027, that changes. If your own planning assumed your pension sat outside your estate, it’s worth checking whether that’s still true.
What’s Actually Changing
The Finance Act 2026 received Royal Assent on 18 March 2026. From 6 April 2027, most unused pension funds and death benefits will count towards the estate for Inheritance Tax, taxed at 40% above the nil-rate band.
From 6 April 2027, most unused pension funds and death benefits will count towards the estate for Inheritance Tax, taxed at 40% above the nil-rate band.
There are exceptions: death-in-service payments from a registered scheme remain exempt, as do transfers to a surviving spouse or civil partner. What’s new is the administrative burden too — personal representatives become responsible for reporting and paying any IHT due on pension funds, adding a layer of complexity to estate administration that many families haven’t planned for.
Why This Catches People Out
The pension change doesn’t arrive in isolation — it lands on top of a set of thresholds that have been quietly tightening for years. The standard nil-rate band has been frozen at £325,000 since 2009. The residence nil-rate band tapers away entirely for estates above £2 million. And UK IHT liabilities passed £7 billion for the first time this year (STEP, 30 July 2026).
Put together, a pension that used to sit safely outside the estate now adds directly to a total that’s already being squeezed from every other direction.
A pension that used to sit safely outside the estate now adds directly to a total that’s already being squeezed from every other direction.
Who Should Be Reviewing Their Position Now
- Anyone with a meaningful pension pot they expect to pass on to family
- Estate plans built on the assumption that the pension sat outside the taxable estate
- SIPP or SSAS holders, where pension values can be substantial and flexible
- Couples relying on outdated first-death/second-death assumptions that predate this change
A Sense of Proportion
It’s worth saying plainly: fewer than 1 in 20 estates currently pay any Inheritance Tax at all (Today’s Wills and Probate). This isn’t a change that suddenly affects everyone.
Fewer than 1 in 20 estates currently pay any Inheritance Tax at all.
But frozen thresholds, rising asset values, and pensions joining the estate from 2027 mean more families are being pulled into that minority every year — often without realising it until it’s too late to plan around.
If your own planning assumed a pension sat outside your estate, that assumption has changed. The only way to know where you actually stand is to look at the full picture — property, savings, pensions and reliefs together.
Check your position with our free, private IHT Wealth Health Check. It takes a few minutes, saves your progress if you need to come back to it, and gives you an indicative estimate by secure link.
Start your Wealth Health Check →
Final Thoughts
The pension rule change doesn’t mean every family needs to act immediately, but it does mean an assumption a lot of estate plans were built on no longer holds. A short review now — before April 2027 — is a much better position to be in than finding out after the fact.
A short review now — before April 2027 — is a much better position to be in than finding out after the fact.
For further assistance or queries, please contact us.
Leeds: 0113 320 9284 Sheffield: 0114 272 4984
Email: info@shipleystax.com
Please note that Shipleys Tax do not give free advice by email or telephone. This article is intended for general information only and does not constitute tax or legal advice. Clients should seek professional guidance before making any decisions.
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This article is for general information only and does not constitute professional advice. Please seek qualified tax advice before taking any action.
