Inheritance Tax Changes to Include Pensions from April 2027

Significant changes are coming to the way inheritance tax (IHT) is calculated in the UK, with most unused pension funds and death benefits set to be included in estate valuations from April 6, 2027. This shift, designed to discourage the use of pensions as wealth transfer vehicles, is projected to bring an additional 152 local authorities within the scope of IHT, increasing the total number to 288 across Britain.

The Scope of the Changes

Currently, unused pension funds and certain death benefits are exempt from IHT. The upcoming legislation will remove this exemption, meaning these assets will be subject to the standard 40% IHT rate on estates exceeding £325,000 . Married couples and civil partners can combine their allowances, potentially allowing up to £1 million to be passed on tax-free, provided the estate remains below £2 million.

However, certain benefits are excluded from these changes, including death-in-service benefits payable from a registered pension scheme and dependant’s scheme pensions from a defined benefit arrangement or collective money purchase arrangement.

Regional Impact

The impact of these changes will not be felt evenly across the country. Areas with moderate property values, particularly in the Midlands, South West, and East of England, are expected to see the most significant increases in IHT exposure.

For example, in Stevenage, a property valued at £315,429 combined with a pension pot of £154,580 could result in an estate value of approximately £470,009, triggering an IHT liability of around £58,003. Similar effects are anticipated in Thurrock, Braintree, Rutland, and other areas.

Affluent areas in London and the South East, already heavily impacted by IHT, will see further increases in liabilities. In Kensington and Chelsea, the inclusion of pension wealth could raise the average IHT bill to approximately £405,211 for estates exceeding £1.3 million.

Conversely, lower-value areas in northern England and coastal regions are less likely to be significantly affected. Locations like Burnley, Hartlepool, and Blackpool are expected to remain largely below the IHT threshold.

Government Revenue Projections

HM Treasury collected £8.25 billion in IHT during the 2024/25 tax year. Projections suggest that annual revenues could exceed £9 billion by the 2026/27 tax year as a result of these changes.

Planning for the Changes

Financial advisors are urging individuals to proactively plan for these changes. Pippa Vick, a financial adviser at The Private Office, emphasizes that IHT is increasingly becoming a “property tax by default” and that early planning is crucial to mitigate potential tax burdens.

Strategies to consider include lifetime gifting, utilizing life assurance, and leveraging available exemptions. It’s important to consider the entire estate, not just pension assets, and to balance IHT exposure with potential income tax implications.

The changes are intended to discourage the use of pensions as a tax-efficient means of wealth transfer and encourage their primary purpose: funding retirement.