Inheritance
Understanding the New Position
From 6th April 2027, the UK Government proposes that unused defined contribution pension funds will be included in the value of an estate for inheritance tax purposes.
For many families, this could represent a significant change to estate planning, particularly where pensions have traditionally been viewed as an efficient way to pass on wealth outside of the taxable estate. As a result, individuals with pension savings may need to rethink how their overall estate is structured and how death benefits are distributed.
This change applies to defined contribution pensions, where a pension pot is built up over time and later used to provide retirement income. The factsheet makes clear that there are no planned changes to the income tax treatment of pensions on death in this context, but the inheritance tax impact could be substantial.
It also notes that personal representatives and pension beneficiaries may be jointly and severally liable for any inheritance tax due on pension funds, which may add both complexity and administrative burden for families and executors.
Inheritance Tax Allowances and Why They Matter
Inheritance tax is usually charged on the value of an estate above the available allowances. In most cases, there is no inheritance tax to pay if the estate is worth less than £325,000, or if everything above that threshold is left to a spouse, civil partner, or charity. In addition, where a home is passed to a qualifying beneficiary, such as a child or grandchild, an extra residence nil rate band may apply, potentially increasing the total tax-free allowance.
The factsheet explains that this additional allowance can be worth up to £175,000 per person, meaning a married couple could potentially pass on up to £1 million before inheritance tax becomes payable. However, this position can become more restricted for larger estates. Where the total estate exceeds £2 million, the residence nil rate band begins to reduce, tapering away by £1 for every £2 above that threshold. This means that even families who expect to benefit from the full range of allowances may find that their tax position worsens once pension funds are added back into the estate under the proposed rules.
Why Early Planning Could Make a Significant Difference
The example in the factsheet shows how dramatic the impact of these changes could be. It describes a married couple, Brian and Linda, with joint assets of £1.1 million and a £1 million pension fund in Brian’s name. Under the current rules, the inheritance tax liability in the example is far lower than it would be under the proposed rules from 2027. Once unused pension capital is included in the estate, and some of the pension passes to non-exempt beneficiaries, the inheritance tax exposure rises sharply.
The factsheet highlights that this can affect both the first and second death, depending on who inherits the pension and how the estate is arranged. It also reinforces the importance of keeping pension records accessible, ensuring wills are easy to locate, and reviewing expressions of wishes or nomination forms so that they reflect current intentions. In practical terms, early planning could help families understand whether their beneficiaries may use up the nil rate band, whether residence nil rate band tapering could apply, and what steps may be available to reduce the eventual tax burden.
This is an area where tailored advice is particularly important. Estate values, family circumstances, property ownership, and pension nominations all interact, so a review of your current arrangements could help you make more informed decisions before the proposed rules come into force. As the factsheet concludes, this is general information only, and qualified financial advice should be sought in relation to your own circumstances and options.