Inheritance tax is set to undergo major overhauls from next year, impacting over 10,000 UK households. HMRC has confirmed the changes will come into effect at the start of the next tax year on 6 April 2027.
Chancellor Rachel Reeves announced the change in law following the confirmation in the Autumn Budget 2024. With less than a year now remaining before it takes effect, those who have spent years building up savings with the intention of passing wealth to the next generation may want to take note sooner rather than later.
What are the inheritance tax changes?
From 6 April 2027, unused pension savings will be brought into the scope of inheritance tax for the first time. This means they will be added to everything else a person owns, including their home, savings, and investments, when working out how much inheritance tax is owed on their estate.
Inheritance tax is charged at 40% on the value of an estate above certain thresholds. The standard threshold is £325,000, rising to up to £500,000 where a home is passed to children or grandchildren, though this is subject to conditions and tapering rules depending on the size of the estate. Anything above the available thresholds gets taxed at 40%, and from April 2027 the pension pot is part of that calculation.
Who will be impacted by the changes?
HMRC modelling suggests around 10,500 estates will fall into inheritance tax for the first time as a result, with a further 38,500 estates already paying inheritance tax facing higher bills averaging £34,000. For those affected, money that was once expected to pass to children and grandchildren largely untouched could now face a significant tax charge before it arrives.
It is also worth knowing that pension savings can be subject to both inheritance tax and income tax in certain circumstances. When a beneficiary withdraws inherited pension money, they pay income tax on top at their normal rate, which means the combined tax burden could be considerable depending on individual circumstances and withdrawal strategy.
The State Pension is not affected by any of this. It simply stops when someone dies. The change is specifically about private and workplace pension savings. Anything left to a surviving spouse or civil partner is also still exempt from inheritance tax.
However, HMRC states that those appointed to settle the affairs of someone who has died will be responsible for taking "reasonable steps" to identify the deceased person's pension savings, work out their value, and pay tax on them. Irwin Mitchell Solicitors warned that families often face "fragmented records, historic workplace schemes and multiple providers". HMRC stated: "The manual refers to 'looking through all the deceased's papers', but what about online records, and the passwords needed to access them?"
What can people do about the changes?
The first step is getting a clear picture of what an estate is actually worth, adding up pension savings alongside property, investments, and other assets to see whether the total is likely to exceed the available thresholds. Reviewing who is named as beneficiary on pension schemes is also worth doing to make sure those details still reflect current wishes.
Beyond that, there are several approaches worth considering. Gifting money to family members during a person's lifetime is one option. Gifts made more than seven years before death are generally exempt from inheritance tax, and even gifts made between three and seven years before death may benefit from taper relief, which reduces the tax owed on a sliding scale.
Trusts can also play a role in estate planning for some people, though the rules around them are complex and the tax implications depend heavily on individual circumstances, so professional advice is worth seeking before going down that route.
A spokesperson for insurance experts Life Pro added: "Early planning is genuinely one of the most important things people can do when it comes to passing on what they have worked hard for. Taking the time now to understand the full picture of what you own, including pension savings, property and investments, and then exploring what arrangements make sense for your situation is far better than leaving it until the rules have already changed. There are a range of options worth looking into, from reviewing beneficiary nominations and gifting strategies to trusts and life insurance policies written in trust, which can help ensure an inheritance tax bill does not come as a shock to the people left behind. What works will be different for everyone, but the earlier you start looking into it, the more choices you are likely to have."
