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Pensions and Inheritance Tax: Preparing Now for the 2027 Rule Changes

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Pensions and Inheritance Tax: Preparing Now for the 2027 Rule Changes

The rules for how pension funds are treated for Inheritance Tax (IHT) are set to change, making early planning essential to ensure you and your family are not disadvantaged when the new measures take effect. First announced in the 2024 Autumn Budget and due to come into effect from April 2027, these changes could significantly influence how estates are structured and passed on.

In this article, we take a closer look at what’s ahead and how proactive planning can help you stay one step ahead.

The Current IHT Landscape

At present, pension pots typically fall outside of your taxable estate for IHT purposes, making them a valuable tool in long-term estate planning. Key allowances and exemptions include:

  • Nil Rate Band (NRB): £325,000 per individual.
  • Residence Nil Rate Band (RNRB): up to £175,000 (depending on the value of your property) when passing your main home to lineal descendants.

Additional Points:

  • The RNRB tapers for estates exceeding £2 million.
  • To qualify, the deceased must have owned a residential interest at some point after the 8th of July 2015.
  • Transfers between spouses and civil partners remain fully exempt from IHT.
  • These thresholds are currently frozen until April 2030.

What’s Changing from April 2027?

From 6 April 2027, unspent pensions are set to become part of the taxable estate upon death, meaning they could be subject to IHT. This represents a significant change from current IHT rules and will impact many families that rely on pensions as a tax-efficient method for intergenerational wealth transfer.

Here is how the new rules are expected to work:

  • If passed to a spouse or civil partner: Expected to remain IHT-exempt.
  • If passed to children or other beneficiaries:
    • Deceased under 75: No income tax, but IHT may apply.
    • Deceased aged 75 or over: Beneficiaries may be liable for both income tax (at their marginal rate) and IHT.

Why Early Planning Matters

While these changes are still under consultation (and subject to change) and will not take effect until 2027, the long-term nature of estate and pension planning means that now is the ideal time to review your arrangements. With proactive steps, you can minimise exposure to inheritance tax and ensure your assets are passed on in line with your wishes.

Key Planning Actions to Consider

Working with our Private Client team, you can explore strategies such as:

  • Updating your Will – Clarify your intentions for your estate, including pension death benefits.
  • Making use of annual gift allowances – Up to £3,000 per year is exempt from IHT.
  • Applying the 7-year rule for larger gifts – IHT applicable on the gift tapers if you survive the gift by more than 3 years and disappears after 7 years.
  • Establishing trusts – Trusts can help manage assets outside your estate, but must be set up carefully due to their complexity and potential tax implications.
  • Taking a tax-free lump sum – Up to 25% of your pension (max £268,275) can be accessed tax-free from age 55 (rising to 57 from April 2028).
  • Considering life insurance – Policies written in trust can help offset IHT liabilities.

How We Can Help

Our experienced Private Client solicitors provide bespoke advice across:

We tailor every solution to fit your individual goals—whether you want to preserve family wealth, support the next generation, or ensure clarity and control over your estate.

Get in touch with our Private Client team