For many years, pensions have been among the most tax-efficient ways to pass wealth on to children and grandchildren. However, that is about to change. From 6 April 2027, most unused pension funds and lump sum death benefits will be counted as part of your estate for inheritance tax (IHT) purposes, following the proposed changes announced in the Autumn 2024 Budget, which we discussed in a previous blog, “Autumn Budget 2024: Main Announcements and Changes”
For families in Alton and across Hampshire, this is one of the most significant shifts in estate planning for a generation.
In this blog, our private client team explains what this could mean if you are planning for your retirement or are already retired and have assumed your pension sits outside your estate. We also review the upcoming changes and how they could impact your loved ones after your death.
What is actually changing in April 2027?
Until now, most unused defined contribution pension pots sat outside your estate when you die. Beneficiaries could often inherit them with little or no IHT, and in many cases, income tax could be deferred or avoided altogether.
From 6 April 2027, that position changes. Most unused pension funds, and many lump sum death benefits paid from registered pension schemes, will be brought into the value of your estate. If your total estate exceeds the available nil-rate bands (currently £325,000, plus up to £175,000 of residence nil-rate band where applicable), the excess will be charged at the standard 40 per cent IHT rate. You can read the government’s guide on how to calculate IHT here: How to value an estate for Inheritance Tax and report its value.
A few key points to be aware of:
- Funds passing to a surviving spouse or civil partner remain exempt, as they are now. The impact is usually felt on the death of the second partner.
- Death in service benefits paid from registered pension schemes will be excluded from the new rules.
- Personal representatives (the people responsible for dealing with your estate) will be in charge of reporting and paying any IHT due on the pension element. They will need to liaise with pension scheme administrators, who must provide valuation information within four weeks of being notified of the death.
- Pension scheme administrators will be able to pay the IHT directly to HMRC if requested by the beneficiaries.
Why has the government made this change?
HM Treasury has been open about its reasoning. Pensions, with their generous tax relief on contributions and tax-free investment growth, were not designed to be used solely as a wealth transfer tool. The Treasury estimates that the new rules will affect around 8 per cent of estates each year and raise additional revenue in the process.
For families who have specifically used pensions as a way to pass on wealth tax-efficiently, the rules are changing, and pensions may no longer play an efficient role in a wider inheritance tax plan. For everyone else, it is still a sensible moment to take stock of how your retirement savings sit within your wider estate plan.
You can read the government’s policy paper and draft legislation on gov.uk here: Inheritance Tax on unused pension funds and death benefits.
The BPR and APR reforms from April 2026
The 2027 pension updates are not the only changes taking effect. Agricultural property relief (APR) and business property relief (BPR) reforms are also set to start. From April 2026, the first £2.5 million of combined qualifying business and agricultural assets will continue to attract 100 per cent IHT relief. Above that figure, only 50 per cent relief will apply, giving an effective IHT rate of 20 per cent on the excess. Shares listed on AIM and similar markets will only qualify for 50 per cent relief. This allowance has increased from the initially proposed cap of £1 million to £2.5 million per estate.
If you are a business owner, farmer, or hold a sizeable portfolio of AIM shares as part of your estate plan, these changes deserve a proper review before they take effect. You can find a useful summary on the House of Commons Library website: Changes to agricultural and business property reliefs for inheritance tax.
Who is most likely to be affected?
Bringing pension funds into the value of a person’s estate for IHT purposes will have a big impact on retirement and estate planning. Those who were planning to preserve their pension pot to pass tax-efficiently to family (other than their spouse) after their death will need to revisit their arrangements.
The families most likely to see a real change in their position are those who:
- Have substantial defined contribution pension pots that they were not intending to draw on in their lifetime.
- Hold business interests, AIM shares, or farmland with a combined value above £2.5 million.
- Have already passed the inheritance tax nil-rate band on their other assets, particularly their home.
If you fall into one of these categories, waiting until 2027 and hoping it works out is the worst thing to do. Most planning options take time to set up properly, and they need to be considered alongside your overall financial picture, not just one tax in isolation. Taking pension benefits, especially tax-free cash, and making gifts may be more attractive from an IHT perspective.
Practical steps to consider now
Sensible first steps for most people will include:
- Reviewing your Will to make sure it still reflects your wishes and is set up to work alongside the new rules.
- Checking the nominated beneficiaries on each of your pension schemes, including any old workplace pensions you may have forgotten about.
- Consider whether to start drawing on your pension to fund your retirement, rather than preserving it as a legacy asset.
- Thinking about lifetime gifting, including the seven-year rule, regular gifts from income, and the use of annual exemptions.
- Looking at whether trusts have a role to play in your wider estate plan.
- Making sure you have valid Lasting Powers of Attorney in place, so that decisions can be made for you if you lose mental capacity.
Each of these has its own implications, so professional advice is important. Pension drawdown decisions in particular often need input from both a solicitor and a regulated financial adviser.
You may also find our previous blogs, ‘Having a Professionally Drafted Will Could Be One of the Most Important Things You Ever Do’, ‘Legal Documents Everyone Should Have’ and ‘Four Reasons to Make a Power of Attorney‘ a useful starting point.
Why review your plans now rather than closer to 2027
The 2027 date can feel a long way off, but the planning window is shorter than it looks. If you wait until next year to start, you may run out of time to use some of the most useful options.
Gifts only sit fully outside your estate after seven years, trusts take time to set up properly, and pension nominations need to be reviewed correctly at each scheme.
For couples, there is also a strong case for reviewing both estates together. Because spouse exemptions still apply, much of the planning can be done with a surviving partner’s position in mind.
How Bookers & Bolton Can Help
Our private client team, led by Emma Bell, Head of Private Client, works with families across Alton and the wider Hampshire area to put their estate planning on a sound footing. We can review your existing Will, look at how your pension and other assets fit into your overall estate, and advise on the role that trusts and lifetime gifting might play.
Where it makes sense, we can work with your financial adviser or accountant so that the legal and financial pieces fit together. You can also find a helpful overview of putting your affairs in order in our Life Planning Guide.
Get in Touch
To speak to one of our solicitors, call us on 01420 558 335, email us at enquiries@bookersandbolton.co.uk or make an online enquiry here.
Please note that this article is meant as general guidance and not intended as legal or professional advice and should not be relied upon as such. Updates to the law may have changed since this article was published.
