For many families, inheritance tax (IHT) has traditionally been viewed as a problem for the very wealthy. However, frozen tax allowances, rising property values and increasing pension wealth mean more estates are now potentially exposed to IHT than ever before.

Adding to this challenge, proposed changes from April 2027 could fundamentally alter the way pensions are treated for inheritance tax purposes, creating new risks and opportunities for those who plan ahead.

What Counts Towards Your Estate?

When assessing a potential inheritance tax liability, it’s important to understand what forms part of your estate.

This can include:

• Property and land
• Savings and investments
• Business interests
• Life assurance policies not written under trust
• Certain lifetime gifts that remain within scope for IHT
• Potentially pension funds under the proposed 2027 rules

For many clients, pensions have become one of the largest assets they own, making the proposed rule changes particularly significant.

Understanding the Current IHT Allowances

The current inheritance tax framework provides a number of valuable allowances:

• Nil Rate Band: £325,000
• Residence Nil Rate Band: £175,000
• Transferable allowances between spouses and civil partners
• Potential combined allowance of up to £1,000,000 for married couples or civil partners meeting the relevant criteria

While these allowances can significantly reduce an IHT liability, many estates are now exceeding these thresholds due to asset growth over time.

The Pension Rule Change Coming in 2027

Under the current rules, defined contribution pensions generally sit outside an individual’s estate for inheritance tax purposes.

Where death occurs before age 75, beneficiaries can often receive benefits free from income tax. Where death occurs after age 75, beneficiaries may pay income tax on withdrawals, but the pension itself is usually outside the estate for IHT.

The proposed changes from April 2027 would mean that unspent pension funds are included within an individual’s estate and assessed for inheritance tax purposes.

For people who have deliberately preserved pension wealth as an intergenerational planning strategy, this could require a significant rethink.

In some circumstances, beneficiaries could potentially face both inheritance tax and income tax, creating what is often referred to as “double taxation”.

Why Reviewing Your Pension Strategy Matters

For years, many retirees have been encouraged to spend ISA and general investment assets first, leaving pension funds untouched where possible.

With pensions potentially moving into scope for inheritance tax, this strategy may no longer be the most effective option for everyone.

Key areas to review include:

• When and how pension benefits are drawn
• The use of tax-free cash
• Beneficiary nominations and expression of wishes forms
• The balance between pension assets and other investments
• Opportunities for lifetime gifting
• The potential role of insurance and trusts in estate planning

Lifetime Gifting Remains a Powerful Tool

One of the most effective ways to reduce a future inheritance tax liability is through carefully structured gifting.

Available exemptions include:

• Annual gifting exemption of £3,000
• Small gifts exemption of £250 per person
• Wedding gift allowances
• Gifts from surplus income
• Charitable donations

Larger gifts can also become exempt from inheritance tax if the donor survives for seven years, with taper relief potentially reducing the tax burden during that period.

Other Inheritance Tax Planning Strategies

No two families are the same, which is why inheritance tax planning should be tailored to individual circumstances.

Depending on objectives and suitability, strategies may include:

Business Relief Investments

Qualifying Business Relief investments can fall outside an estate after two years while still allowing the investor to retain ownership and access to the capital.

Trust Planning

Trusts can allow assets to be passed to future generations in a controlled and tax-efficient manner.

Structures such as Gift & Loan Trusts and Flexible Reversionary Interest Trusts may help reduce inheritance tax exposure while maintaining varying degrees of flexibility and access.

Insurance Solutions

Inheritance tax bills often become payable within months of death.

Life assurance written in trust can provide beneficiaries with cash to settle an inheritance tax liability without the need to sell assets quickly.

What Should You Do Next?

The proposed pension changes represent one of the most significant shifts to estate planning in recent years.

If you haven’t reviewed your inheritance tax position recently, now is the ideal time to:

• Calculate your current potential IHT liability
• Review how your pension fits into your wider estate plan
• Update beneficiary nominations and expression of wishes forms
• Consider gifting, trusts or Business Relief solutions where appropriate
• Seek professional financial planning advice before making any decisions

Final Thoughts

Inheritance tax planning is not simply about reducing a tax bill. It’s about ensuring your wealth passes to the people you care about in the most efficient way possible.

With potential pension changes on the horizon, early planning and regular reviews are becoming increasingly important. Taking action now could help preserve more of your family’s wealth for future generations and avoid unnecessary complexity for your loved ones later.