Thousands of UK households are set to be hit with significant new tax bills averaging £34,000 due to a major rule change from HM Revenue and Customs (HMRC). The reform, which comes into effect in 2027, will bring pension wealth into the scope of Inheritance Tax (IHT) for the first time.
The Scale of the Change
According to estimates from the Labour Party government, the new rules will impact a substantial number of estates. Of approximately 213,000 estates expected to have inheritable pension wealth in the 2027-2028 tax year, around 10,500 will be directly affected by the change. Furthermore, the government calculates that about 38,500 estates will end up paying more IHT than they would have under the current system.
The core of the change is straightforward but far-reaching. Currently, pension pots can often be passed on free of IHT. From 6 April 2027, the value of these pension assets will be included when calculating the total value of an estate for IHT purposes. This is expected to push the average IHT liability up by roughly £34,000 for those affected.
Expert Advice: Plan, Don't Panic
Financial advisors across the country are urging clients to take a measured and informed approach. Scott Gallacher, Director at Leicester-based Rowley Turton, reported that proactive communication has been key. "We’ve increased client communications through newsletters, webinars and practical tools," he said, highlighting resources like IHT scorecards and calculators on their website.
"That early engagement has meant most conversations are thoughtful rather than reactive," Gallacher explained. He noted clients are carefully considering how pensions fit into their wider estate plans, rather than rushing into technical fixes. Common strategies now being reviewed include:
- Updating pension beneficiary nominations.
- Reassessing the role of pensions as a vehicle for inheritance.
- Using pension income more strategically to facilitate lifetime gifting.
- Exploring specialist solutions like Gift and Loan arrangements or Discounted Gift Trusts.
Navigating Your Personal IHT Landscape
Rob Mansfield, an Independent Financial Advisor at Tonbridge-based Rootes Wealth Management, emphasised that the first step is understanding your personal exposure. "Inheritance tax is often a blind spot with clients. The first step I take is to look at it and say does it actually have any impact? I find that most people haven't fully grasped how this may affect them," he stated.
Mansfield's process involves working through an individual's specific scenario, needs, and lifespan to project potential outcomes. From there, options like insuring the future tax liability or implementing a gifting strategy can be explored. "Once you have that plan in place, some options open up, whilst others close off," he added.
Colin Low, Managing Director at Ipswich-based Kingsfleet, offered clear, time-sensitive guidance. "At the moment – do nothing," he advised, pointing out that the current favourable rules remain in force until April 2027. This means anyone who died before that date would still have their pension wealth excluded from their estate.
However, Low stressed the importance of forward planning. "It would be wise to review arrangements in the second half of this year in preparation for the changes next Spring," he recommended. The goal is to ensure pension funds are structured to meet both income provision and tax-efficient inheritance objectives for chosen beneficiaries.
