IHT on Pensions: What To Consider Before April 2027
From April 2027, pension funds will be brought within the scope of inheritance tax for the first time.
This represents one of the most significant changes to estate planning in decades and requires urgent attention from anyone with substantial pension assets.
What's Changing?
Currently, pension funds sit outside your estate for
IHT purposes. On death, your pension can pass to beneficiaries (usually tax-efficiently) without triggering an IHT charge.
This has made pensions one of the most powerful estate planning tools available.
From 6 April 2027, however, this changes. Pension funds will be included in your estate for IHT purposes, potentially attracting a 40% tax charge on death.
The Scale of the Impact
For many families, pensions represent the largest single asset after a lifetime of accumulation. Someone who has diligently contributed to pensions and benefited from compound growth may find themselves facing an unexpected IHT liability running into hundreds of thousands of pounds.
Consider a family with:
- A £1.5 million pension pot
- A family home worth £800,000
- Other assets of £200,000
Under current rules, only the home and other assets would count for IHT (£1 million, less the nil-rate band and residence nil-rate band). Under the new rules, the full £2.5 million would be in scope, a potential IHT liability of around £600,000 on the pension element alone.
Planning Options
Several strategies may help mitigate the impact:
Drawing down pensions
Taking benefits during your lifetime and gifting surplus income removes value from your estate. However, this requires careful consideration of income tax consequences.
Life insurance
A whole-of-life policy written in trust can provide funds to meet IHT liabilities without depleting the estate.
Trust planning
Depending on circumstances, trust arrangements may offer some protection, though the interaction with pension rules is complex.
Relocation
For those considering a move abroad, changing tax residence before death may affect the IHT position on worldwide assets, including pensions.
The Information-Sharing Challenge
Making IHT work on pensions presents significant administrative challenges.
Pension schemes will need to share information with HMRC and executors about fund values at death.
The mechanics of this are still being worked out, with recent consultations addressing:
- How schemes will report to personal representatives
- Timeline requirements for information provision
- Treatment of death benefits nominations
- Interaction with existing lifetime allowance replacements
What Should You Do Now?
With April 2027 approaching, time to plan is limited:
- Review your pension position: Understand the current value and projected growth of your pension funds
- Assess your overall estate: How do pensions fit within your total IHT exposure?
- Consider your options: What planning strategies are appropriate for your circumstances?
- Act promptly: Some options (like potentially exempt transfers) require time to achieve full IHT efficiency
- Take professional advice: The interaction of pension, tax, and estate planning rules is complex
The Relocation Angle
For those already considering international relocation, the IHT changes add another factor to the analysis.
Establishing genuine non-UK residence before death may affect the IHT treatment of your worldwide estate, though the rules here are nuanced and depend on domicile as well as residence.
If you're weighing up a
move to the UAE, Portugal, or elsewhere, now is the time to factor pension IHT into your planning.
Mosaic Chambers advises HNWIs on estate planning and international relocation.
Contact us to discuss how the pension IHT changes affect your plans.
