The 6 April 2027 Pension Tax Changes: Rethinking Your Estate Planning

In what is arguably one of the biggest changes to the UK pension landscape in decades, most unused defined contribution pension pots will be included in a person's estate for Inheritance Tax (IHT) purposes from 6 April 2027.

If you have built up a substantial pension pot—or hold a historically large fund under the assumption that it is safely shielded from inheritance tax—you will need to radically rethink your estate planning strategy.

Understanding the Thresholds

To understand the impact of this change, it helps to review the baseline allowances available to UK estates:

• Nil-Rate Band (NRB): Every individual has a tax-free allowance of £325,000.
• Residence Nil-Rate Band (RNRB): An additional £175,000 allowance is available if you pass a main residence to direct descendants (children, grandchildren, stepchildren, or adopted children). This allowance is either £175,000 or the value of the property, whichever is the lower value.

For a married couple or civil partners, these allowances are fully transferable. If the first partner passes their entire estate to the survivor, the surviving partner can access a combined allowance of up to £1 million (though the RNRB is capped at the actual value of the property on death, although it can be higher if they downsized prior to death). Any portion of an estate valued above these combined allowances is taxed at a flat rate of 40%.

The impact of dragging pensions into the IHT net is best demonstrated by looking at a single individual with no children (meaning the RNRB does not apply).

If someone who passes away with a defined contribution pension pot of £500,000, a home worth £200,000, and liquid assets of £100,000 on the current system no Inheritance tax will be due. Post 6 April 2027 there will be assets of £800,000 after offsetting the nil rate band will leave £475,000 liable to inheritance tax leaving an inheritance tax bill at 40% of £190,000.

While leaving money to nieces, nephews, or extended family is a priority for many single individuals, this rule change means a massive £190,000 slice of that wealth will now go to HMRC instead.

Key Exemptions Remain

Fortunately, a few vital tax reliefs remain intact, though they require careful timing:

• The Spousal Exemption: If a married couple passes all assets to each other, the unused pension will not trigger an IHT bill on the first death. However, this is effectively kicking the tax can down the road. Hard decisions and actionable planning will still need to be taken by the surviving partner to prepare for the second death.
• Charitable Giving: Individuals can make gifts to registered charities to reduce the inheritance tax (IHT) payable on their estate. For example, if an estate is valued at £500,000 and only the standard £325,000 Nil Rate Band (NRB) is available, the chargeable estate would be £175,000. By leaving 10% of this amount (£17,500) to a registered charity, the estate would qualify for the reduced IHT rate of 36% instead of 40% on the remaining chargeable estate.

Without the charitable gift, the IHT liability would be £70,000 (£175,000 × 40%). With a charitable legacy of £17,500, the remaining chargeable estate would be £157,500, resulting in an IHT liability of £56,700 (£157,500 × 36%). This reduces the tax bill while supporting a chosen charity.

Tax treatment depends on individual circumstances and may change over time. The value of any tax benefits or reliefs will therefore vary from person to person and cannot be guaranteed.

Surpassing the £2 Million Threshold

The inclusion of pensions brings a hidden sting for wealthier estates: the tapering of the Residence Nil-Rate Band.

The £175,000 property allowance diminishes by £1 for every £2 that an estate exceeds £2 million on death. By dragging large pension pots into the total valuation, many of families will suddenly find their property allowances entirely wiped out.

The cliff-edges arrive quickly:

• For a single person, the RNRB is completely eliminated once the total estate hits £2,350,000.
• For a married couple passing everything to each other, the combined RNRB vanishes entirely at £2,700,000.

When this happens, you are thrown back on the basic Nil-Rate Bands (£325,000 for a single person, £650,000 for a couple), exposing the remainder of the estate to a heavy tax burden.

The Administrative Nightmare for Executors

Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.