Upcoming changes to the rules surrounding pensions and Inheritance Tax (IHT) mean that, from April 2027, most pensions will be included in your estate for IHT purposes for the first time.
In the 2025 Autumn Budget, the chancellor also announced that the main IHT thresholds will remain frozen until April 2031.
Together, these regulations mean that more estates are likely to either fall within the scope of IHT for the first time or face a larger-than-expected bill.
Passing on your hard-earned wealth to your loved ones is likely to be important to you, and you may need to consider how the upcoming changes will affect you. Fortunately, with careful strategic planning, you can ensure that your estate is as tax-efficient as possible.
Read on to discover how you can achieve this.
As more estates come into the scope of Inheritance Tax, tapering rules could also see your liability increase
What you do with your wealth after you die is a deeply personal decision. However you choose to distribute it, putting your estate in good order so your loved ones aren’t left with a high IHT bill can help them during what will already be a difficult time.
You may already have a robust estate plan in place. However, the upcoming pension changes, along with thresholds remaining frozen, mean that this plan might need revisiting.
Before looking at the details of how these changes could impact your wealth, it’s worth explaining some of the fundamentals of IHT.
- The nil-rate band is set at £325,000 until 2031. This is the amount you can pass on without IHT.
- If you leave your home to your children, stepchildren, or grandchildren, the residence nil-rate band of up to £175,000 can also be applied. This means you could pass on £500,000 tax-free.
- If you’re married or in a civil partnership, you could transfer your entire estate to a spouse or civil partner without IHT. They can also inherit any unused portion of your nil-rate bands, meaning you could leave up to £1 million tax-free between you.
- However, if your estate is worth over £2 million, the residence nil-rate band will be tapered by £1 for every £2 over £2 million.
- Charitable donations made during your lifetime or left in your will are not included in your estate for IHT purposes.
- IHT is usually applied at 40%. However, if you leave more than 10% of your estate to charity in your will, this falls to 36%.
According to the government, a further 10,500 estates will have an IHT liability where they previously did not, and around 38,500 estates will pay more IHT under the new rules.
Taking all of this into consideration, it’s a good idea to review your existing estate planning strategy to make sure it’s still fit for purpose after upcoming changes and threshold freezes.
Let’s look at some examples:
A married couple, before the new pension rules came into effect, would have:
- A house worth £1 million
- Other assets worth £900,000
- Pensions worth £500,000.
Their total estate would be worth £1.9 million, as the pension isn’t included. Assuming they have not already used their nil-rate band and qualify for the residence nil-rate band, they could have up to £1 million of tax-free allowances available.
After applying the nil-rate bands, the remaining £900,000 would be subject to IHT at 40%, resulting in a £360,000 IHT bill.
The same scenario, under the new rules, might play out like this:
- From April 2027, the £500,000 pension will be included in their estate.
- The new estate value is £2.4 million.
- As the estate is worth more than £2 million, the residence nil-rate band taper will come into play, reducing the tax-free allowance by £1 for every £2 over £2 million.
- The original residence nil-rate band is £350,000 between the couple.
- The taper will reduce the residence nil-rate band by £200,000, leaving it at £150,000.
The new calculation for this couple will look markedly different now.
Their combined nil-rate bands are £650,000, and their reduced residence nil-rate band is £150,000, meaning their total IHT-free allowances are £800,000.
This leaves £1.6 million exposed to IHT, which, applied at 40%, will be £640,000.
That’s an increase of £280,000 for the same estate and assets. The inclusion of the £500,000 pension has added taxable value, triggered the residence nil-rate band taper, and so reduced available allowances.
Shifting your spending strategy to align with the new regulations could reduce your Inheritance Tax liability
Under the existing rules, a common strategy might have been to spend ISA and other taxable assets first while preserving pension wealth, as pensions have typically sat outside the estate for IHT purposes. However, the impact on the estate would depend on how those funds are used — assets purchased would usually remain within the estate, and gifts may only fall outside it after seven years.
Once the new rules come into effect, however, this strategy could cost your loved ones a significant amount more in IHT. So, controlling your estate’s value could prove to be a more productive approach.
Gifting during your lifetime could be an effective way to reduce the size of your estate. Speak to us about how we can help you explore the various options to do this.
Get in touch
Strategic planning and cashflow modelling can help to establish how your estate may look under a range of different scenarios, including the addition of your pension. If you’d like to know how this could work, we’ll be happy to help.
Please email us at info@servoprivatewealth.com or call 01444 715200 to find out more.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate estate planning, tax planning, will writing, or cash flow modelling.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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Approved by Best Practice IFA Group Limited on 12/03/2026.