Executive Summary
From April 2027, unused pension funds will be subject to Inheritance Tax, ending decades of tax-efficient wealth transfer. Combined with the £1 million Business Relief cap from April 2026, these reforms represent the most significant tightening of estate planning rules in recent memory.
The government’s confirmation of major Inheritance Tax reforms marks a watershed moment for UK estate planning. Advisers and investors must fundamentally rethink their approaches to wealth transfer.
Impact at a Glance
213,000
Estates with pension wealth annually
75%
Remain below IHT threshold
49,000
Additional estates affected
£1m
Business Relief cap
The End of Tax-Free Pension Inheritance
What’s Changing
Currently, most pension funds can be passed to beneficiaries free of Inheritance Tax, making them an attractive vehicle for wealth transfer. From April 2027:
- Unused pension funds will be subject to IHT at 40% (above the Nil-Rate Band)
- Death benefits from pension schemes will be included in estate valuations
- The existing income tax treatment remains unchanged
| Current Rules | From April 2027 |
|---|---|
| Most pensions pass IHT-free | 40% IHT on pensions (above Nil-Rate Band) |
| Popular estate planning tool | Included in estate valuations |
| No limit on tax-free transfer | Income tax rules unchanged |
A Simplified Process Following Industry Feedback
The government initially proposed making pension scheme administrators responsible for IHT calculations and payments. Following extensive consultation, this approach has been abandoned in favour of keeping Personal Representatives in control.
Benefits of the PR-Led Approach
Simplified Administration
One party handles all IHT calculations across the entire estate
Better Coordination
PRs already have oversight of all estate components
Reduced Delays
Faster payment to beneficiaries once IHT position is clear
Payment Flexibility
Multiple options for settling IHT liabilities
Payment Options Under the New System
PRs and beneficiaries will have several routes to pay IHT on pension assets:
- Direct payment from the estate: PRs pay all IHT from liquid estate assets
- Beneficiary-directed payment: Pension beneficiaries instruct schemes to pay HMRC directly
- Beneficiary payment with reclaim: Beneficiaries receive funds and pay IHT, reclaiming any income tax paid on the IHT portion
Important Exemptions
Death in Service Benefits
All death in service benefits from registered pension schemes will remain exempt from IHT.
Spousal Exemption
Pensions passing to spouses and civil partners remain IHT-free, maintaining this fundamental principle of UK tax law.
Timeline for Implementation
Now – April 2026: Planning Phase
- Review and restructure existing arrangements
- Consider Business Relief investments within the new framework
- Update wills and estate planning documents
April 2026: BR/APR Changes
- Business Relief and Agricultural Property Relief caps take effect
- Trust rules change with new 10-year refresh periods
April 2027: Pension Changes
- Pension IHT changes take effect
- New information sharing requirements between pension schemes and PRs
Practical Implications
For High Net Worth Individuals
- Traditional pension maximisation strategies lose their IHT advantage
- Diversification across multiple tax-efficient vehicles becomes essential
- Early lifetime planning gains importance
For Business Owners
- The combined £1 million BR cap and pension changes create a double impact
- Succession planning requires more sophisticated structuring
- Insurance solutions may become more relevant
For Financial Advisers
- Client conversations need to happen now, not in 2026
- Holistic estate planning replaces single-solution approaches
- Documentation and information gathering become critical
Key Takeaways
- The era of unlimited tax-efficient wealth transfer is ending – both pensions and business assets face new restrictions
- Timing matters – with different implementation dates, sequencing of planning actions becomes crucial
- No silver bullets remain – successful estate planning will require multiple strategies and acceptance of some IHT exposure
- Information is power – the new rules demand comprehensive record-keeping and coordination
- Action beats perfection – delaying planning in hope of further changes is likely counterproductive
Looking Ahead
These reforms represent a fundamental shift in government policy towards inherited wealth. The two-year lead time provides an opportunity for thoughtful planning. Those who act decisively and seek appropriate advice will be best positioned to navigate this new landscape.
This article is for information purposes only and does not constitute financial advice. Tax treatment depends on individual circumstances and may be subject to change. Professional advice should be sought before making any financial decisions.
