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UK guide to pensions and inheritance tax changes

From April 2027, the rules around pensions and Inheritance Tax (IHT) are changing. It will mean that unused pension funds and other death benefits will be included in your estate. This could affect how much IHT your loved ones need to pay.  

11.11.25

By Alan Boswell Group

an older couple looking at a uk guide to pensions and inheritance tax changes

We look at the changes in more detail, who it’s likely to impact, and what you can do to prepare. 

What are the April 2027 pensions and inheritance tax changes? 

The government announced in the 2024 Autumn Budget that from 6 April 2027, most unused pension funds and death benefits will be classed as part of a person’s estate. Personal representatives (the executor or administrator of the estate) will be responsible for reporting and paying any additional IHT.  

The rule changes will affect defined contribution pensions and death benefits, including: 

  • Defined contribution drawdown pensions. 

  • Uncrystallised funds (pension funds that haven’t been accessed yet). 

  • Lump sum death benefits  

You can find a complete (and technical) list at GOV.UK.

Are there any exceptions to the pension and IHT changes? 

There are a few exceptions which won’t be affected by the changes, including: 

  • Death in service benefits paid from an HMRC-registered pension scheme. 

  • Dependent’s scheme benefits from a defined benefit arrangement (schemes that provide an income to a dependent, such as a spouse). 

  • Benefits paid from a collective money purchase agreement (schemes where funds are pooled). 

Why are these changes being implemented? 

Currently, most private pensions are set up as discretionary schemes, which are not considered part of your estate (the assets you leave behind when you die). Because of this, any money left in a pension pot can be passed on to beneficiaries tax-free.  

The existing rules mean that pension schemes can be used as a tax-planning tool that preserves wealth, instead of pensions being used solely as retirement income. These changes will no longer allow people to pass on wealth tax-free through the use of a pension.  

Another reason for the change is to make the rules around pensions consistent. While many pension schemes are classed as discretionary schemes, schemes for some public sector workers (such as the NHS) are classed as non-discretionary and are already included in your estate when you pass away. 

Who will these pension and IHT changes affect? 

Most people won’t be affected by the changes. The government estimates that, of those forecast to have an inheritance tax liability in 2027-28,10,500 estates out of 213,000 will need to pay IHT when they wouldn’t have before. Around 38,500 estates could end up having to pay more IHT than before. 

Strategies to mitigate the new tax change  

If you’re considering making changes to your current arrangements, it’s essential to speak with a qualified professional, such as a financial adviser or tax specialist.  

Anyone providing financial advice must be authorised to do so by the Financial Conduct Authority (FCA). You can find a list of authorised firms and advisers on the Financial Services Register on the FCA website.  

An adviser will help you explore the most suitable options based on your specific circumstances, which may include: 

Leaving assets to your spouse  

Assets transferred to your spouse or civil partner are exempt from IHT (and this will continue to be the case from April 2027). With this in mind, it’s worth speaking to a financial adviser if you haven’t already specified that your spouse should benefit from any discretionary pension arrangements. 

Gifting assets to beneficiaries 

An adviser may suggest gifting money or assets to other family members now, as they can be exempt from IHT depending on the value, or if gifts are made more than seven years before you pass away.  

Drawing down your pension to make gifts should be considered carefully with proper guidance. A financial adviser will review your overall financial position to work out if this is an option to consider.  

 

Setting up a whole of life insurance policy 

Whole of life insurance policies (also known as life assurance) pay your beneficiaries a tax-free lump sum when you pass away. A financial adviser can work with you to determine what the IHT liability on your estate is likely to be when you pass, and structure a life insurance policy with a payout that will cover the cost of that liability.  

As long as the policy is written ‘in trust’, it will not make up part of your estate and the full value of the policy will be paid out to your loved ones, unaffected by IHT.  

As policies written in trust are not part of your estate, the lump sum payment also won’t be part of any lengthy probate procedures.  

Are there any other IHT changes I need to know? 

The government has introduced other changes that affect IHT. The first change was introduced in April 2025 and only affects people with ‘non-dom’ status whose main home is outside of the UK.  

Other IHT changes that will affect UK citizens from April 2026 include the £1 million limit for Agricultural Property Relief and Business Relief. Under new rules, 100% relief can be claimed for certain agricultural or business assets, but this will be capped at £1 million (it is currently unlimited). Any remaining assets valued over the £1 million limit will qualify for 50% relief. If you think this might affect your estate planning, you can find out more in our guide to business relief.  

The government also announced that the inheritance tax thresholds will remain at £325,000 until 2030. Any value over the threshold will be charged IHT (unless you leave it to a spouse, civil partner, or charity).  

Estate planning to benefit your loved ones 

Estate planning can be complicated, and the upcoming changes could leave your loved ones facing a hefty IHT bill when you pass away. You can help minimise financial and emotional stress by seeking professional financial advice sooner rather than later. 

Need financial advice?

If you’re looking for advice, contact a member of our financial planning team. Over the last 40 years, we’ve guided our clients, enabling them to make decisions that suit them and their families.

Speak to us:  01603 967967

Please be aware that: 

All information is correct as of 16 October 2025. Please note, the value of an investment and any income from it can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future. 

The value of tax benefits depends on your individual circumstances and the laws concerning these can change. 

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