HM Revenue & Customs (HMRC) is preparing to implement significant changes to inheritance tax (IHT) rules that will affect families with substantial pension savings. Under reforms set to take effect from April 6, 2027, most untouched pension funds will be incorporated into estate calculations, potentially increasing the inheritance tax liability for many.
Tax expert Andy Wood of Tax Barrister UK explains that pensions have historically been a tax-efficient way to pass wealth, as they were generally excluded from inheritance tax assessments. “This advantageous position changes significantly from April 2027,” Wood says. “Families who have accumulated large pension pots may see a larger portion of their estate become subject to IHT.”
Many retirees have relied on income from other assets while leaving their pensions untouched because pensions provided valuable inheritance tax benefits. With the upcoming reforms, these strategies are likely to lose their effectiveness.
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Wood also points out the administrative challenges ahead: “Individuals often hold multiple workplace pensions from different employers throughout their careers. Executing such estates will involve tracking down old pension schemes, obtaining valuations, and liaising with several providers, which can be time-consuming.”
He advises families to maintain clear and updated records of their pension arrangements to streamline the process and avoid complications. “While not everyone will be affected, those with significant pension savings should proactively review their estate planning to adapt to these changes.”
HM Treasury underscores the intent behind the reform, stating: “This change aims to prevent pension schemes from being used primarily as tax planning vehicles for wealth transfer, rather than serving their intended purpose of funding retirement.”
Currently, pension scheme members can accumulate substantial funds within pension products, which can then be passed on to beneficiaries free of inheritance tax. The government estimates that between 2027 and 2028, approximately 213,000 estates will include pension assets, with around 10,500 of these estates likely to incur an inheritance tax charge under the new rules.