The UK's inheritance tax landscape is set for a significant overhaul, with major implications for families and their financial planning. From April 2027, most pensions will be included in inheritance tax calculations, a shift from the current exemption on unused pension funds. This change is projected to bring an additional £362 million into HMRC coffers in the 2027-28 tax year.
According to government estimates, 10,500 estates that previously avoided inheritance tax will now face a bill, while around 38,500 estates are expected to see their liability rise by an average of £34,000. The number of estates subject to IHT is still anticipated to remain relatively low; however, the impact on those affected could be substantial.
Under the existing system, individuals can pass on up to £325,000 free of inheritance tax through the nil-rate band, with an additional residence nil-rate band of up to £175,000 applying if a main home is left to direct descendants. This means couples can typically leave up to £500,000 without incurring IHT, with allowances transferable between spouses or civil partners potentially allowing for a combined total of up to £1 million to be passed on tax-free.
The new rules will apply to defined contribution (DC) pensions, including Self-Invested Personal Pensions (SIPPs), and lump sum death benefits from defined benefit (DB) pensions. However, ongoing income payments from DB pensions to surviving spouses or civil partners, death-in-service benefits from both DC and DB pensions, and joint-life annuities will remain exempt, as well as the State Pension which cannot be inherited.
As a result of these changes, personal representatives will need to identify all pension arrangements, obtain valuations from providers, and settle any inheritance tax due within six months of the end of the month of death. This increased complexity underlines the importance of understanding pension provisions and their tax implications for estate administration.