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The UK’s inheritance tax system is set for a significant shift in April 2027, with unused private pensions now falling within the scope of taxable estates.
This development could impact thousands of families, especially those with moderate to large pension savings. Understanding how these changes affect gifting rules, estate thresholds, and long-term wealth planning is essential.
This guide explores the key updates and what they mean for managing pensions, assets, and intergenerational wealth in the years ahead.
What Are The Major Inheritance Tax Changes Coming In 2027?
The UK Government has announced a substantial change to how inheritance tax will be applied from April 2027, which could have significant implications for how families plan and pass on wealth.
The most notable update involves the inclusion of unused private pension pots in the total value of an estate for inheritance tax (IHT) purposes.
This marks a major departure from the existing system, where most private pensions can be passed to beneficiaries tax-free, depending on the age of death and the type of pension scheme.
Under the current rules, if someone dies before the age of 75, the remaining pension funds can usually be inherited tax-free.
Even when someone dies after 75, the pension can often be transferred without forming part of the deceased’s estate for inheritance tax calculation. However, starting from April 2027, this tax shelter will no longer apply.
Any remaining balance in a private pension at the time of death will be added to the estate’s total value, and taxed accordingly if the overall estate exceeds the IHT threshold.
This policy shift is expected to bring a broader section of the population into the inheritance tax net, especially middle-income families.
Given that private pension pots can easily exceed £200,000 or even £500,000 for long-time savers, their inclusion could mean that estates which previously avoided inheritance tax will now become liable.
Why the Change Matters?
The inclusion of pension pots is more than a technical update it alters a core pillar of retirement and inheritance planning in the UK.
For years, pensions have been used not only as retirement income vehicles but also as strategic tools for passing wealth to future generations.
Many individuals have intentionally left pension funds untouched to pass them on to children or grandchildren.
From 2027, this strategy may trigger significant tax liabilities unless alternative estate planning measures are put in place.
Impacts of the Change
- Greater exposure to inheritance tax for estates that previously fell under the threshold
- Shift in retirement planning strategies, with more emphasis on pension drawdown or annuity use during retirement
- Increased urgency for gifting and early estate planning, especially among retirees with significant pension savings
- More complex tax scenarios for executors and beneficiaries managing estates with a mix of property, investments, and pension assets
It is anticipated that these changes will encourage many individuals to start redistributing wealth earlier in life, through gifts or trusts, in order to reduce the size of their taxable estate. In fact, surveys have already shown an uptick in lifetime gifting activity, particularly among people over 65 who are aware of the looming changes.
The upcoming inheritance tax rules represent a shift toward taxing a broader base of wealth and assets, with pensions no longer protected from consideration. For individuals and families alike, the time to prepare is now before the rules take full effect.
How Will Pension Pots Be Treated Under The New Inheritance Tax Rules?
Under the current rules, pension pots are generally exempt from inheritance tax if the owner dies before drawing them or while there is an unused balance.
These pensions are typically passed down to a nominated beneficiary tax-free, depending on age and other criteria.
From April 2027, these funds will be added to the overall estate value, which could easily push it over the threshold.
This change will mean a significant shift in how pensions are perceived in estate planning. Families who believed their pensions would not contribute to inheritance tax liability will need to reassess their strategies.
The impact of this inclusion is best illustrated through a comparison:
| Estate Components | Before 2027 (Taxable) | After 2027 (Taxable) |
| Property Value | £400,000 | £400,000 |
| Investments and Savings | £100,000 | £100,000 |
| Private Pension (Unused) | Not Taxable | £300,000 |
| Total Estate Value for IHT | £500,000 | £800,000 |
Previously, the estate might have fallen within the £500,000 threshold (including residence nil-rate band). After the change, the same estate could face a 40% inheritance tax on the £300,000 pension value now included.
What Does The Inheritance Tax Threshold Mean For Families?
The nil-rate band remains a key component of the inheritance tax framework. Every individual in the UK is entitled to a tax-free threshold of £325,000.
When a home is passed to direct descendants such as children or grandchildren, the residence nil-rate band increases the threshold by a further £175,000, bringing the total to £500,000 per person.
This can be combined between spouses or civil partners, allowing up to £1 million to be passed on tax-free, provided all conditions are met.
However, with rising property values and the inclusion of pensions from 2027, many estates that previously sat below this level may now exceed it.
The application of thresholds is not automatic. Families must ensure proper documentation and legal structure, such as the correct wording in wills, to benefit from these allowances.
Key implications of the thresholds:
- Estates exceeding the threshold will face a 40% tax on the surplus
- Estates below the threshold pay no inheritance tax
- Residence nil-rate band is only applicable when passing the main home to direct descendants
What Gifting Rules Still Apply To Reduce Inheritance Tax?
Gifting remains one of the most effective ways to reduce the size of an estate and, consequently, its inheritance tax liability. Certain gifts are exempt from tax altogether, while others become exempt over time.
The annual gift allowance enables individuals to give up to £3,000 per tax year without affecting inheritance tax. If this allowance goes unused, it can be carried forward one year, allowing a maximum gift of £6,000 in certain situations.
Additional tax-free gifts include:
- Small gifts of up to £250 per person each tax year, provided no other exemption is used for that person
- Wedding gifts:
- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to other recipients
These gifts do not count towards the estate and are immediately exempt from inheritance tax. Gifting strategies are commonly used by individuals planning ahead for generational wealth transfer.
How Does The Seven-Year Rule Affect Larger Gifts?
Larger gifts that exceed annual exemptions are subject to the seven-year rule. According to this rule, if the donor survives for seven years after making the gift, it is considered outside the estate for inheritance tax purposes.
If the donor dies within seven years, the gift may still be subject to inheritance tax, although taper relief reduces the tax liability as more time passes between the date of the gift and the date of death.
| Years Between Gift and Death | Tax Rate (Taper Relief Applied) |
| 0 to 3 Years | 40% |
| 3 to 4 Years | 32% |
| 4 to 5 Years | 24% |
| 5 to 6 Years | 16% |
| 6 to 7 Years | 8% |
| More Than 7 Years | 0% |
To maximise the benefit of this rule, individuals are encouraged to gift early and keep records of each transaction. Gifts made earlier in life offer greater tax efficiency and reduce the complexity for executors managing the estate.
Why Is Record-Keeping Critical For Inheritance Tax Planning?
Record-keeping plays a central role in inheritance tax compliance. Executors must report all relevant gifts and calculate the tax owed on the estate. If records are incomplete or inaccurate, it can lead to incorrect tax assessments and potential penalties.
Essential details to maintain for every gift:
- Name of the recipient
- Date of the gift
- Description and value of the gift
- Purpose or context of the gift (e.g., wedding, birthday)
- Whether the gift was made from income or capital
These records will assist executors in applying the appropriate exemptions or taper reliefs. HMRC may request these details during the probate process, especially if gifts were made in the seven years preceding death.
What Qualifies As Normal Expenditure Out Of Income?
There is a special exemption for gifts made as part of regular spending from surplus income. These gifts are not considered part of the estate for inheritance tax purposes, as long as they meet certain conditions.
To qualify, gifts must:
- Be part of a regular pattern or habit
- Be made from income, not capital
- Leave the donor with enough income to maintain their usual standard of living
This exemption is commonly used in the following scenarios:
- Paying insurance premiums into a trust
- Covering school fees for grandchildren
- Making regular birthday or Christmas gifts
- Providing a monthly allowance to a relative
- Paying ongoing care expenses for a dependent
Unlike the seven-year rule, there is no time requirement for these gifts to become exempt. However, documentation and consistency are crucial for the exemption to be valid under scrutiny from HMRC.
Can Non-Cash Assets Also Be Gifted Tax-Efficiently?
Inheritance tax applies to more than just cash. Non-cash assets such as property, investments, and valuable personal items can also be gifted in a tax-efficient manner, provided the rules are followed.
Examples of assets that can be gifted include:
- Residential or commercial property
- Shares or investment portfolios
- Jewellery, antiques, and art collections
- Vehicles and other personal valuables
Gifting these assets can help reduce the estate’s taxable value, but the timing, valuation, and method of transfer must be carefully planned.
Charitable giving also offers tax efficiency. Gifts to registered UK charities are exempt from inheritance tax. Moreover, if at least 10% of the net estate is left to charity, the tax rate on the rest of the estate drops from 40% to 36%.
Gifts to qualifying organisations such as political parties, universities, and national museums may also be exempt under specific provisions.
Who Is Responsible For Paying Inheritance Tax?
Inheritance tax is typically paid by the estate. The person in charge of administering the estate, often referred to as the executor, is responsible for settling any inheritance tax due before distributing the assets to beneficiaries.
However, if gifts were made within seven years of death and the estate does not have enough funds to cover the tax, the responsibility may fall on the recipient of the gift.
Key responsibilities include:
- Calculating the value of the estate
- Identifying gifts made within seven years
- Applying relevant exemptions and reliefs
- Submitting inheritance tax returns to HMRC
- Ensuring tax is paid before distributing the estate
It is crucial that the executor has access to full records, especially regarding gifts and pension arrangements.
The introduction of pensions into the taxable estate from 2027 adds another layer of complexity, which should be addressed with the help of financial or legal professionals.
Conclusion
The inheritance tax changes in 2027 will significantly affect how estates are valued, particularly due to the inclusion of private pensions. Many families who previously fell below the inheritance tax threshold may now be liable for substantial tax bills.
Understanding the rules around gifts, exemptions, and thresholds, and taking proactive steps such as early gifting, pension planning, and estate documentation, will be essential to reduce tax exposure.
The changes serve as a timely reminder: effective inheritance tax planning is no longer just for the wealthy it’s becoming a necessity for the average UK household.
Frequently Asked Questions
What types of pensions will be included in inheritance tax calculations from 2027?
From April 2027, most private pensions, including defined contribution pensions, will be included in the value of the estate for inheritance tax purposes if they remain unused at the time of death.
Is my state pension included in my estate for inheritance tax?
No. The UK State Pension is not included in the inheritance tax calculation, as it ceases upon death and cannot be passed on as an asset.
Can I avoid inheritance tax by putting my pension in a trust?
Certain pension trusts may provide some protection, but most standard discretionary pension schemes will be included in estate calculations post-2027. It’s best to consult a financial adviser.
What happens if I give away my home but still live in it?
If you gift your home but continue to live in it without paying market rent, HMRC considers it a “gift with reservation”, meaning it still counts as part of your estate for inheritance tax purposes.
Do ISA savings count towards inheritance tax?
Yes, ISA savings (Individual Savings Accounts) are included in your estate and can be taxed if your estate exceeds the inheritance tax thresholds.
How are business assets treated in inheritance tax?
Some business assets may qualify for Business Relief, potentially reducing or eliminating inheritance tax liability on them. However, this depends on the type of business and asset.
Are gifts to grandchildren treated differently for inheritance tax?
No, gifts to grandchildren follow the same rules as other gifts. However, certain allowances (like the £2,500 wedding gift allowance) specifically apply to grandchildren.