Following the announcement by HMRC that draft legislation will be published later this year to bring most unused pension funds and death benefits within the value of a person’s estate for Inheritance Tax (IHT) purposes, it is vital to plan ahead. The changes will be effective from 6 April 2027 and while this marks a significant shift in how pensions are treated for IHT purposes, it also presents a perfect opportunity to review and strengthen your financial and estate planning strategies.
What’s changing?
Under the proposed rules, unused defined contribution (DC) pension pots and most death benefits will be included in the taxable estate. This means that pensions, which were previously exempt from IHT, could now be taxed at up to 40% on amounts exceeding the £325,000 nil-rate band (NRB), or £500,000 if the residence nil-rate band (RNRB) applies. Estates valued over £2 million will see a tapered reduction in the RNRB.
Practical steps you can take
To prepare for these changes, consider the following planning options:
1.Review your pension arrangements
Assess how your pension savings are structured and whether they fall within the scope of the new rules. Defined benefit (DB) pensions and death-in-service benefits may be treated differently, so understanding the specifics of your scheme is key.
2.Update your estate plan
Work closely with your financial adviser, tax planner and legal adviser to ensure your estate plan reflects the upcoming changes. This may include revisiting your Will, pension nominations, and the use of trusts or other vehicles to manage wealth transfer.
3.Consider lifetime withdrawals
Drawing down pension funds during your lifetime, especially if you’re already retired, could reduce the value of your estate and mitigate future IHT liabilities.
4.Explore gifting strategies
Making use of annual gift allowances or larger gifts (potentially exempt transfers) could help reduce the size of your taxable estate over time. Such gifts could be given directly or placed in a trust, it is best to seek professional advice on how best to do this.
5.Stay informed and seek advice
The draft legislation and HMRC’s response to industry feedback will provide further clarity. Staying up to date and consulting with a professional adviser will help ensure your plans remain compliant and tax-efficient. It could also be sensible to update your expression of wish form to make sure that appropriate beneficiaries (from an income tax perspective) will benefit from the pension so there is not penal income tax in addition to IHT.
6.Consider whole of life cover
A policy that pays out on death and can help cover any potential IHT liability. Placing it in trust may improve tax efficiency.
7.Use charitable giving
Leaving 10% or more of your net estate to charity can reduce the IHT rate from 40% to 36%, while supporting causes you care about.
8.Explore business relief investments
Investing in qualifying businesses may offer up to 100% IHT relief after two years, combining tax benefits with growth potential.
Please note that you should always take advice before proceeding with any of these options.
Looking ahead
While the full details are still being finalised, the direction of travel is clear: pensions will no longer be a guaranteed IHT-free asset. Taking proactive steps now can help you adapt to the new landscape and protect the value of your estate for future generations. It’s also important to watch out for the upcoming Budget to see what other potential changes there might be.
Get in touch
For further information or advice on how the changes may impact you and your financial planning strategies, please contact our financial planning team by emailing financialplanning@pmm.co.uk or calling 01254 679131.
The value of investments can fall as well as rise. You may not get back what you invest.
The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.
