From April 2027, new inheritance tax (IHT) rules confirmed by Chancellor Rachel Reeves will include unspent pensions in estate valuations, potentially leaving families with significantly higher tax bills. The change is expected to impact unmarried partners and blended families particularly hard, as key exemptions do not apply to them.
How the New Rule Affects Estates
Currently, pensions can be passed on tax-free in many cases, but under the new rules, any unused pension funds and death benefits will be counted as part of the estate for IHT purposes. This means that estates previously below the tax threshold could now face substantial charges.
According to calculations by investment platform Interactive Investor, an unmarried partner inheriting a £600,000 estate from April 2027 could face a tax bill of £110,000. Under current rules, no tax would be owed on such an estate due to available exemptions and allowances.
Impact on Blended Families and Unmarried Couples
Craig Rickman, personal finance expert at Interactive Investor, said: “With inheritance tax rules changing and blended families becoming more common, more grieving family members may be left with a hefty tax burden upon receiving money or assets on death. Younger people might not be aware that the amount of tax they pay on inherited assets depends on factors outside their control, including their parents' marital status. Some valuable inheritance tax-free allowances and exemptions don’t extend to unmarried couples.”
The changes are part of a broader reform aimed at closing a loophole that allowed pensions to be used as a tax-efficient way to pass on wealth, rather than for retirement income.
Government Statement on the Reform
HM Treasury said: “This measure will bring most unused pension funds and death benefits within the value of a person’s estate for Inheritance Tax purposes from 6 April 2027. Personal representatives will be liable for reporting and paying any Inheritance Tax due on unused pension funds and death benefits. Death in service benefits payable from a registered pension scheme and dependant’s scheme pensions from a defined benefit arrangement, or from a collective money purchase arrangement, are excluded from these changes and will not be in scope of Inheritance Tax.”
The Treasury added: “This measure removes distortions which have led to pension schemes being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for funding retirement. It also removes inconsistencies in the Inheritance Tax treatment of different types of pensions.”
Political Context
Rachel Reeves is widely anticipated to be replaced as Labour Party Chancellor by Ed Miliband or Wes Streeting under a potential Andy Burnham government. However, the IHT rule change has already been confirmed and will proceed regardless of future leadership changes.
