The government has confirmed it will move ahead with plans to include unspent defined contribution pensions in IHT calculations from April 2027. This marks a major change: until now, pensions have usually fallen outside the estate for IHT, often making them an efficient way to pass on wealth.
What’s changing?
Following consultation, some elements of the original proposal have changed. Death in service benefits paid from registered pension schemes will remain exempt, as will scheme pensions paid to a dependant from defined benefit arrangements and death benefits from collective money purchase schemes. The government has also confirmed that a deceased person’s legal personal representatives will be responsible for declaring pension benefits within the IHT return to HMRC.
Impact on estates
Around 8% of estates are expected to be affected annually, with average IHT bills rising by an estimated £34,000. The impact could be greater if individuals do not review their arrangements in light of the changes. From 2027, all estates that include pensions will need to assess whether IHT is due, creating potential delays as pension providers and executors share information.
Another concern is the risk of double taxation. Pensions inherited after age 75 are already taxed as income; from 2027, they could also face IHT. This could leave beneficiaries losing more than half the pension value to tax, even at basic rates.
Planning considerations
There are ways to reduce future IHT exposure, such as:
Gifting: Up to £3,000 annually tax-free, with the IHT impact on larger gifts reducing in stages to zero after seven years
Trusts: Though complex, these can remove assets from the estate
Charitable Giving: Leaving 10% of the estate to charity reduces IHT rate to 36%
Whole of life insurance: Written in trust to cover IHT liabilities
Looking ahead
The change highlights the need for careful estate planning. With rules shifting, pensions can no longer be assumed to fall outside IHT. Reviewing your position now – including pensions, property, and other assets – will help ensure your wealth is passed on as intended. With the rules not applying until April 2027, there is still time to plan effectively.
