A Quiet Change in Law Adds Pensions to Inheritance Tax

A couple in their late sixties last month. They had done everything right. Over thirty years, they had built a pension pot of just over £500,000. They were living off their ISAs and savings, keeping the pension untouched for their children. It was the correct advice at the time. It meant the pension would pass to their family free of inheritance tax.

That advice is now wrong. A change in the law, already passed, quietly reverses a decade of sensible planning. For many families, it creates a six-figure tax bill where none existed before.

What has changed

From 6 April 2027, most unused pension funds will be added to your estate when calculating inheritance tax. Until then, they sit outside it. It is that simple. This is not a proposal. It is happening.

For years, the strategy was clear: spend your other assets first and preserve the IHT-free pension. From 2027, that preserved pension pot pushes many estates over the threshold. Above your allowances, the tax is 40%. The trigger is your date of death. Die on 5 April 2027, the old rules apply. Die the next day, and your pension is part of your estate.

The new arithmetic

Consider a widower. He owns a flat worth £300,000 and has £500,000 in his pension. His entire estate is intended for his daughter.

Under the current rules, his taxable estate is just the flat, valued at £300,000. This is covered by his £325,000 nil-rate band. The inheritance tax bill is zero. The pension passes separately.

From April 2027, his estate is £800,000. His combined allowances for the property and his personal allowance total £500,000. The remaining £300,000 is now subject to inheritance tax at 40%. The bill is £120,000. This is money that was meant for his family.

The planning implication for UK families is direct. The order in which you draw down your assets must be reviewed. What was once a tax-efficient legacy for your children may now become a significant liability for your estate.

This isn’t cause for alarm. It is a reason to have a conversation. Your situation is unique. If you want to understand what this means for you, we should talk.