If you’ve worked hard to build up your pension pot — alongside property, investments or a business — there’s an important change on the horizon that could have a major impact on your family’s future wealth.
From April 2027, pensions are set to become subject to Inheritance Tax (IHT) for the first time. For many families, this could mean a larger tax bill on death, unless proactive planning is put in place.
Let’s explore what’s changing, what it could mean in practice, and the key ways you can still protect your wealth for future generations.
🧭 What’s Changing?
At the moment, pensions sit outside your estate for IHT purposes. That means when you pass away, your pension funds can usually be passed to your chosen beneficiaries free from Inheritance Tax, and often income-tax-free if death occurs before age 75.
However, from 6 April 2027, the government plans to include unused pension funds within your taxable estate, meaning they could now face the 40% IHT charge — just like your property, ISAs or other investments.
While final details are yet to be confirmed, this could make a significant difference to what your family ultimately inherits.
💰 What Could the Difference Look Like?
Example 1: Current Rules (2025/26)
Sarah has a £1 million pension pot and passes away aged 80. She has already used her £325,000 nil-rate band elsewhere.
Under current rules, her pension is outside her estate — so no IHT is due.
Her beneficiaries receive the full £1 million (subject to income tax as they draw it).
Example 2: Post-2027 Rules
If Sarah dies after April 2027 and her pension is brought into her estate, the same £1 million could now face 40% IHT, resulting in a £400,000 tax bill.
Her beneficiaries could be left with just £600,000 — a huge difference for the same pot of money.
⚖️ Why This Matters for Wealthy Clients
For some clients whose total wealth — across property, investments, and pensions — already exceeds as little as £325,000, this change could significantly increase their exposure to inheritance tax.
In short, pensions will no longer be the “tax-free wrapper” for intergenerational wealth they once were — and ignoring the issue could cost your beneficiaries dearly.
🌳 How to Reduce the IHT Impact
Thankfully, there are several smart, tax-efficient strategies that can help reduce or even eliminate the IHT bill.
1️⃣ Business Relief (BR) Investments
Certain qualifying investments — such as holdings in trading businesses or AIM-listed shares — can qualify for Business Relief (BR), offering powerful inheritance tax advantages.
Under current rules:
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The first £1 million of qualifying business assets (per person) can attract 100% IHT relief after just two years.
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Any value above £1 million can still benefit, but would typically be subject to 20% IHT instead of the full 40% rate.
- AIM listed shares will quality for 20% rather than 40% inheritance tax
This makes Business Relief investments a flexible option for those wanting to retain access to capital while still reducing the taxable value of their estate.
However, business relief is a high risk investment and isn’t right for everyone.
2️⃣ Whole of Life Insurance – Creating Liquidity for the Tax Bill
Even with the best planning, many families will still face some level of IHT. That’s where Whole of Life insurance can come in.
This type of policy is designed to pay out on death, providing a lump sum to cover the IHT bill.
When written in trust, the proceeds fall outside your estate, so the money can be accessed quickly to pay HMRC — without selling property, investments or business assets.
It’s an effective way to create liquidity at exactly the time your family needs it most.
3️⃣ Trust Planning
Trusts remain a cornerstone of good estate planning. You could consider moving surplus income or capital into trust, reducing the value of your taxable estate while maintaining control over how and when funds are distributed.
A spousal bypass trust can also help direct pension death benefits outside of your beneficiaries’ estates, keeping wealth flexible and protected for future generations.
4️⃣ Gifting and the ‘7-Year Rule’
If you have more than you’ll realistically spend, lifetime gifting can be one of the simplest and most effective IHT-reduction strategies.
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Outright gifts are IHT-free after seven years
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You can use your £3,000 annual exemption each year
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Regular gifts from surplus income are immediately exempt, provided they don’t affect your standard of living
Even modest, regular gifting can make a meaningful difference over time.
5️⃣ Charitable Giving
Leaving 10% or more of your estate to charity can reduce the IHT rate on the remaining estate from 40% to 36% — allowing you to support causes you care about while reducing your family’s tax bill.
6️⃣ Review Your Pension Nominations
Even though pensions may soon fall within IHT, they remain a flexible estate-planning tool.
Make sure your expression of wish is up to date and reflects your current circumstances and intentions — especially if you’re considering new strategies like trusts or insurance.
🌟 Taking a Holistic Approach
Every client’s situation is unique. The right plan depends on your wealth, income needs, family structure, and long-term goals.
We take a holistic view, combining investment management, tax-efficient structuring, and protection planning to ensure your money supports both your lifestyle today and your legacy tomorrow.
🏡 Final Thoughts
The proposed changes to pensions and IHT represent a major shift in how wealth may be taxed in the UK.
But with early planning — through Business Relief, trusts, lifetime gifting, and Whole of Life cover — you can still stay one step ahead and ensure your wealth passes smoothly to those who matter most.
If you’d like to explore how these changes could affect your estate, or what planning options might work best for your family, please do get in touch.
I’d be happy to help you review your position and create a plan that gives you — and your loved ones — peace of mind.
❓ FAQs
Will my pension be taxed when I die after 2027?
Yes. Under proposed changes, unused pension funds are expected to be included in your estate for IHT purposes from April 2027.
How can I reduce inheritance tax on my pension?
Consider strategies such as Business Relief investments, trust planning, lifetime gifting, and Whole of Life insurance to cover any remaining tax liability.
What is Business Relief for Inheritance Tax?
Business Relief allows certain business or qualifying AIM investments to be passed on with up to 100% IHT relief on the first £1 million of value (20% IHT thereafter).
How does Whole of Life insurance help with IHT?
A Whole of Life policy, written in trust, pays out on death to provide cash to settle the IHT bill — ensuring your family doesn’t need to sell assets to pay the tax.
You can find more information about how to reduce your inheritance tax bill here
You can also read my previous blog Investments & Inheritance Tax Planning: Keeping More in the Family here
Risk warnings
· The value of investments, and the income from them, can go down as well as up.
· You may not get back the full amount you invest.
· Past performance is not a reliable indicator of future results.
· The tax treatment of investments depends on individual circumstances and may change in the future.
· Pensions: Your eventual retirement income will depend on contributions, investment performance, and tax rules at the time
· ISAs: Tax advantages depend on your personal circumstances and may change.
· Property/Alternative Investments: The value of property and specialist investments can be harder to sell (illiquid) and may rise and fall in value more sharply.
· Business Relief / EIS / VCTs: These are higher-risk investments and may not be suitable for all investors. They are often illiquid and tax benefits depend on HMRC rules.
· Investments should always be considered in line with your risk profile and personal circumstances.
· You should seek professional advice before making any investment decision.